At a high level, an escrow account is a financial account used to handle transactions between two or more parties. A neutral party holds the assets until certain conditions are met. Then, the assets go to the account beneficiary.
When you hear the term “escrow,” your mind might go straight to homebuying, but businesses can also use escrow accounts to ensure security, diligence and low risk during transactions.
Let’s discuss what business escrow accounts are, how they work and tips to find the right escrow account for your business.
The basics of business escrow accounts
Business escrow accounts allow for assets, funds or documents in a business transaction to be held in an account managed by a neutral third party (such as a bank or attorney) known as an escrow agent. Assets held in escrow accounts generally remain inaccessible to all involved until the predetermined conditions of the escrow agreement are met.
Escrow agents have a responsibility to act according to the instructions laid out in the escrow account documents. They must also act in a way that benefits all parties in that agreement.
These accounts can come in several forms, including:
- Non-interest-bearing checking accounts
- Interest on Lawyer Accounts (IOLAs)
- Interest on Lawyers' Trust Accounts (IOLTAs)
- Interest on Trust Accounts (IOTAs)
Different types of business escrow accounts may be used to meet the needs of specific transactions, such as mergers and acquisitions or settlements.
How does an escrow account work?
When opening a separate escrow account, you must establish the escrow agreement. That contract sets up the parameters for all parties involved.
The agreement typically covers:
- How the escrow agent will generally handle the funds
- The conditions under which the funds would be released
- Any duties required by the involved parties
- The beneficiary (or payee) of the agreement
- Fees owed to the escrow agent
- How legal disputes would be handled
- How funds will be delivered
After the escrow bank account is set up and documents are signed, the payor can deposit the funds. The escrow agent then holds those assets in the account until they verify that the conditions of the escrow agreement have been met.
Finding the right escrow account for your business
Escrow accounts can be valuable tools when businesses need to securely exchange funds. But some business escrow accounts may be more appropriate for your business needs than others.
When shopping for an escrow account, you may want to consider factors such as:
- Accessibility: Checking accounts, for instance, may offer employee debit cards for easier deposits and withdrawals
- Fees: Escrow agents can charge fees for their services, such as outgoing wire transfer and monthly account fees
- Services: Some banks may offer services like account alerts and easily downloadable records
There are many iterations of escrow accounts. Carefully reviewing the terms of the agreement can help you and the other parties find an account that suits your collective needs.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to describe or indicate the availability of any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
