If you’ve ever bought a house or been involved in another large transaction, then you’ve probably heard the term “escrow” before. But, what on earth does it mean? Well, it’s quite simple. This post will go through a normal escrow transaction, to help you understand.
There are many different types of escrow. Some involve money, which are more common. Others involve different assets, like software source code or property. But, the idea is still the same. In principle, an escrow transaction will involve a buyer, a seller, and a third party. The third party holds any funds or assets that are to be transferred until both the buyer and seller are happy that all of the terms have been met.
Of course, this seems a little odd. Why add a middle man to a normal transaction? Well, in most cases, it’s done for protection. Say a company wants to buy a piece of software to use on a regular basis. Most developers won’t sell their source code because it would give the buyer the ability to resell the software. It also makes it harder for the developer to keep the buyer paying for any services. So, the software developer will only sell a company a compiled product; that can’t be taken apart. But, what happens if the developer goes out of business?
That would leave the buyer without a product or way to update it. This is where the third-party comes in. They securely store the source code, to eliminate both other parties concerns.
The third-party is trusted because they handle lots of escrow transactions every year. They’re experienced and have the infrastructure to keep assets safe. Of course, the buyer and seller don’t just rely on this. Both a financial and software escrow company have to be licensed to deal with these transactions. Alongside this, they will also have extensive legal agreements in place, that they can’t risk breaking. This means that they have to operate by the book and be careful with the assets they hold. If not, they risk losing all of their customers.
Obviously, these sorts of transactions are complicated and very involved. This is an additional benefit of having a third-party, to both the buyer and seller. It means that they don’t have to deal with the legal side of things, giving them both confidence that they’re not being ripped off. It also means that they don’t have to worry about any loose ends. Neither the buyer or seller has to worry that the transaction will terminate prematurely or without all of the terms met. Without it, it would be very hard to stop dodgy business occurring.
Of course, the law is different in every country. So, before committing to a transaction like this, you should make sure it satisfies your own country’s legal requirements. This means doing a little bit of research. Hopefully, though, this should give you enough to start working on your own big bucks transactions with confidence. It’s worth putting in extra effort to make sure that your property and rights are protected.