What is it used for, & are there costs involved?
An Escrow is a third party that manages funds or assets and charges an agreed fee for this service in a transaction. Below are brief examples of Escrow usage.
Type of Escrow
- Mergers and Acquisitions
- Project Finance
- Capital Raising and JVs
- Litigation Settlement Funds
- Real Estate and Construction
- Pension Scheme Funding
- International Trade Finance and Supply Chain Disruption
- Ship Closing
Escrow and the Stock Market
Stocks are often Issued in Escrow. In this case, while the shareholder is the real owner of the stock, the shareholder has limited rights when it comes to the disposal of the stock.
For example, executives who receive stock as a bonus to their compensation often must wait for an Escrow period to pass before they can sell the stock. Stock bonuses are a tactic used to retain top executives.
Escrow in Finance
An Escrow is an agreement between parties and is used as an instrument to settle payments from one party to another. An Escrow instrument involves the Escrow Holder, also known as the paymaster, the purchaser, the seller, and the funder.
The Escrow Holder is a person such as a lawyer, an accountant, or a person held in trust by one or all of those mentioned.
Most large financial and or asset transactions involve the use of an Escrow Agent. However, this is normally an automatic process, and it may not be mentioned there is an Escrow in place. The use of a lawyer in any purchase transaction is an Escrow.
Other Escrow Usage
Two Parties are in the process of completing a transaction, and there is uncertainty over whether one party or another will be able to fulfill their obligations. Contexts that use Escrow include Internet transactions, banking, intellectual property, real estate, mergers and acquisitions, law, and many more.
Consider a company that is selling goods internationally. That company requires assurance that it will receive payment when the goods reach their destination. The buyer, for their part, is prepared to pay for the goods only if they arrive in good condition.
The buyer can place the funds in Escrow with an agent with instructions to disburse them to the seller once the goods arrive in a suitable state. This way, both parties are safe, and the transaction can proceed.