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What is an escrow?

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Escrow is a financial arrangement between two parties that secures a transaction between them. It incorporates a trusted third party who acts as an intermediary. It protects the parties who may have suspicions about the proper completion of their transaction. It is a solution that is developing, particularly when there are many obligations to be fulfilled before a purchase is made. We have chosen to present this legal and financial arrangement in this article to help you understand how it works and its benefits.

1. What is an escrow?

An escrow account is a financial arrangement in which a trusted third party (bank or independent service provider) acts as an intermediary between the contracting parties. This trusted third party carries out the receipt and payment of funds for the parties. It temporarily holds the funds stipulated in the contract until the preconditions for the successful completion of the transaction are met.

To illustrate this concept, consider the case of a buyer who wishes to acquire a solution offered by a seller. Both agree to entrust the sum to a neutral person, the trusted third party. This person is responsible for holding the funds for the duration of the transaction and acting only when a clause (or several clauses) is fulfilled.

The escrow is set up in circumstances where many obligations have to be fulfilled before any payment solutions can be found. This method is already well known in the real estate sector, in export transactions to countries with less secure financial systems or in the context of intellectual property for example. Currently, new sectors of activity are starting to use it, such as e-commerce or web development, where computer developers hand over source codes to trusted third parties who take care of storing them in complete security.

2. What are its advantages?

It is a payment solution that aims to reduce the risk in a transaction between two parties. The main advantage is to share the risks between the two parties and to secure them. Firstly, the buyer is secure in the knowledge that the funds will only be paid to the seller once he has fulfilled his obligations. The seller, on the other hand, is reassured to know that he will be paid after his obligations have been fulfilled. Then, by entrusting the funds to a trusted third party, the person depositing the settlement shows his or her motivation to buy to the seller. Finally, the funds will only be released by the trusted third party if both parties agree that their obligations have been fulfilled. This solution is therefore very reassuring.

 

In conclusion, escrow is an interesting solution if you want to buy or sell products or solutions that involve many obligations and conditions before a transaction. Indeed, it allows you to greatly secure your transactions. If you would like to know more about this definition, we invite you to contact us or to consult our offers here.

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