All scales of economies have evolved dramatically over the last two or three decades – especially with the advent of online sales marketplaces and classifieds. As opportunities have opened up for small and mid-sized businesses to become larger players in their respective industries, the old approaches to payment and credit have not evolved at the same pace. Below, we’ll explore some of the long-standing types of payment systems still in place and how they stack up when compared with online escrow services.
This type of payment process is great for long-standing business relationships where the time spent underwriting the requesting party can be justified.
Buyers typically have 30, 60 or 90 days to clear outstanding balances
Good for consistent, repeat business between two parties
Underwriting for another party is time consuming and requires a knowledgeable staff to execute.
Not often smart for first-time business transactions
Businesses with questionable credit can be denied open lines of credit
Open lines require accounts receivable attention and can be viewed as negative credit.
Long term spot rates for foreign currencies is often required as transaction can take months to close.
Just like it sounds, this type of payment is much more secure for the seller than the buyer as all the purchase funds are transferred before the purchased goods arrive.
Sellers have all purchase funds up front
Funds are out of the buyer’s account almost immediately – eliminates the need to monitor open credit lines.
Transferred funds are completely out of the buyer’s hands leaving that business to simply rely on purchase agreements to guarantee arrival.
Burden is now entirely on the seller to execute the agreement in a timely manner
Requires a larger amount of liquid assets to be available for buyers
Letters of Credit
A longstanding form of payment, Letters of Credit are a double-edged sword for both parties when it comes to B2B transactions.
The buyer has the full good standing of the bank behind their offer of payment
Bank acts as an intermediary between two unknown parties and can assist in settling disputes.
Letters of Credit can be costly – fees are often in the area of 2% of the total transaction amount and are collected from both parties.
Fees associated with Letters of Credit can often make them cost prohibitive for transactions of less than $50,000.
Modifications to terms may also cause disruption in the process
Discrepancies in documents sent by the seller can potentially cause the issuing bank to void the document entirely.
Escrow services tend to offer a more balanced approach when it comes to security for both the buyer and the seller in addition to shorter closing periods.
Buyer’s funds are verified up front and held by a neutral party
No underwriting is required
Partial payments or refunds are easily executed as needed
Little to no attention required from accounts receivable teams
Spot rate for transactions only needs to be estimated for 24-48 hours from time of payment request to payment deposit.
- While not as intensive as open credit, escrow does require some monitoring by both parties to ensure that any documentation or approval deadlines are met.
While a number of the above options have great applicability for specific types of transactions, escrow is really the only category that has the flexibility and cost benefits to work quickly and efficiently for both long-standing and new business relationships. For more about how escrow and benefit your business, see this post on finding qualified buyers for your online marketplace.