The International Trade Administration’s Trade Finance Guide says that an escrow service is a cash-in-advance option available to exporters and importers that reduces the potential risk of fraud. An escrow service acts as a trusted third party that collects, holds and disburses funds according to agreed-upon instructions from the exporter and importer in the transaction. Formerly, companies were forced to use expensive and time-consuming letters of credit from a bank guaranteeing the importer’s payment.
Escrow services like PaySAFE® provide a simple and cost-effective workflow for completing the transaction quickly and protecting both parties:
Step 1: The importer or the exporter completes an online contract outlining the terms of the sale, including purchase price and expectations for when funds will be released to the exporter.
Step 2: The other party reviews the transaction terms and approves the escrow contract.
Step 3: The importer sends the agreed-upon purchase amount to the escrow service.
Step 4: After payment is verified, the exporter is instructed to ship the goods. Upon delivery, the importer has a predetermined amount of time to inspect and accept the goods in the system.
Step 5: Once accepted, the funds are released by the escrow service to the exporter. The escrow fee can either be paid in full by one party or split evenly between the importer and the exporter.
The Trade Finance Guide also points out that any sale is considered a gift until payment is received. PaySAFE® requires the importer to pay into the escrow account with a wire transfer, guaranteed funds for the exporter’s protection. PaySAFE also distributes funds via a wire for speed and guarantee of funds.
As illustrated in the Trade Finance Guide, different payment types present different risks to exporters and importers, and, for a variety of reasons, not all of the identified methods of payment are available (or desirable) to both parties.
Here’s how the Trade Finance Guide illustrates payment methods as more or less secure for importers or exporters:
The Guide recommends escrow services for “transactions with importers who demand assurance that the goods will be sent in exchange for advance payment,” and states that “escrow in international trade is a service that allows both exporter and importer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions are met.”
Given the risk inherent in new trade relationships, escrow services can offer a mutually-beneficial, cash-in-advance method for importers and exporters in a variety of circumstances. Trade partners in new relationships or relationships that have presented difficulty in the past benefit from credit enhancements; and small companies for which letters of credit are too costly and time-consuming to complete benefit from a simplified and cost-effective workflow. Escrow is a tool that protects all parties and encourages international trade.