What Is an Escrow Account for Business?

Key insights:

• An escrow account holds funds or assets with a neutral third party until specific conditions are met
• Businesses use these accounts to reduce risk during complex transactions, such as mergers and acquisitions
• Escrow agents manage the account and ensure all parties fulfill their contractual duties
• Selecting the right account involves comparing fees, accessibility and available banking services

At a high level, an escrow account is a financial account used to handle transactions between 2 or more parties. A neutral party holds the assets until certain conditions are met. Then the assets are transferred 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 help ensure security and minimize 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 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 an 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 in accordance with the instructions set 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 an 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 parties involved
• 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.

Pros and cons of an escrow account for businesses

There are both advantages and disadvantages of an escrow account, depending on your business needs. Weighing these factors could help you decide if this type of arrangement makes sense for your next major transaction.

Benefits of a business escrow account

• Protection: Escrow accounts can shield both payors and payees by ensuring funds are only released when conditions are met
• Trust: Using an escrow account can build confidence between parties, especially in high-value or complex transactions
• Dispute resolution: A neutral third party can mediate and hold funds in case of disagreements

Considerations of a business escrow account

• Associated fees: Escrow services typically charge fees, which could be a percentage of the transaction amount or a flat fee
• Third-party reliance: Businesses must rely on the escrow agent to handle funds and verify conditions, which could result in delays in disbursements 

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 better suited to your needs than others.

When shopping for an escrow account, you may want to consider factors such as:

• Reputation: You’ll want a trustworthy bank and an unbiased, experienced agent who is skilled in mediation
• Fees: Escrow agents can charge fees for their services, such as outgoing wire transfer and processing 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.

Discover business bank accounts with Citi

Escrow accounts aren’t exclusive to homebuying or mortgages — businesses of all sizes take advantage of them to mitigate risk and foster trust during complex transactions. Whether your company is navigating an acquisition or managing a legal settlement, finding the proper account structure is an essential step toward financial well-being.

That said, an escrow account is just one type of account you might need for your business. Citi offers a variety of business checking, CD and money market accounts with features and services tailored to your needs. Explore Citi business bank accounts today to get started.

Escrow account FAQs

Who owns the money in an escrow account?

The funds in an escrow account belong to the depositor until the agreement conditions are fulfilled. The escrow agent simply acts as a neutral guardian of the assets. Once all requirements are satisfied, ownership transfers to the designated beneficiary.

Can I withdraw money from my escrow account?

You generally cannot withdraw funds from an escrow account at your own discretion. The release of funds is strictly governed by the terms of your specific escrow agreement. Money is only distributed by the agent once all parties meet the predetermined conditions.

How long can money be held in an escrow account?

Funds generally remain in escrow until the contract requirements are fulfilled. Some transactions take just a few days, while others might take months or even years to complete. The agreement typically specifies a timeline or expiration date for the transaction.

Can I set up an escrow account without a mortgage?

Yes, you could establish an escrow account without a mortgage. Businesses frequently use them for mergers, acquisitions, legal settlements and large asset purchases. They are highly versatile tools for situations that require a neutral third party to hold funds.

Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.