Escrow in International Transactions
Use a third part to hold money in international transactions
Ready to export your goods? Don’t want the hassle of a letter of credit but want your cash upfront? Perhaps an escrow service is the answer. Learn what an escrow service is, how it is used in international trade, and where can you turn for help on using an escrow service.
What is an Escrow Service?
Escrow services allow both exporters and importers to protect a transaction by placing funds in the hands of a trusted third party that collects, holds, and disburses funds until a specified set of conditions is met by the instructions of the exporter or importer. Shipments are tracked to ensure the seller shipped, and the buyer received the merchandise.
This can be a mutually beneficial method of payment on international trade transactions. Some people use escrow services to reduce the potential risk of fraud.
When it comes to smaller size transactions (less than $5,000), typically wire transfers, credit cards, and PayPal are the most commonly used cash-in-advance payment devices that exporters use, but an escrow service can serve as an alternative option.
Why It's Needed and How it Works
You have a brand new customer with no payment history. Therefore, to minimize your risk, you ask for payment in advance, but it is the least attractive option for the buyer. Why? Because it tends to create cash-flow problems for them and it fuels the concern that the goods may not be sent if payment is made in advance. Further, asking for cash in advance is a disadvantage when competing against other vendors the buyer has to choose from worldwide unless they are also asking for cash in advance. The truth of the matter is that if you insist on cash in advance as your sole payment method for doing business worldwide, you may limit your export potential and therefore lose out to competitors that are willing to offer more attractive payment terms.
How escrow works. The importer (buyer) sends the agreed purchase amount to the escrow service. After payment is verified, the exporter is instructed to ship the goods. Upon delivery, the importer (buyer) has a predetermined amount of time to inspect and accept the goods. Once accepted, the funds are released by the escrow service to the exporter. The escrow fee can either be paid in full by one party or split evenly between the exporter and the importer.
Where to Turn for Help?
Here are a few available escrow services. Be sure to check references of customers who have used these services before proceeding. If your buyer insists that you use a specific escrow service and will not accept an international escrow service that you are comfortable with for international transactions as an alternative, you might want to decline the transaction for the possibility of fraudulent activity.
4. J.P. Morgan
Escrow services can be a win-win for both importers and exporters who desire a cash-in-advance method of payment on smaller sized transactions.