Escrow Agreements: Build Your Business and Control Your Cash Flow
by Peter Bianchetta, Video & Telecommunications, Inc.
When I began a business in 1982 selling to the Federal Government, it was very important that I had the ability to ensure my vendors were paid and satisfied with our relationship. Vendors can do a lot to assist building a business in addition to providing good pricing. Vendors/Suppliers on numerous occasions provided me with many excellent leads based on our good business and financial relationship, which helped me grow my business for over 25 years.
But what if you are just entering business or have limited capital resources? It is possible to make a vendor comfortable doing business with you when a large order needs to be filled? Another concern is making sure the vendor ships all of the correct product(s) at the agreed upon pricing, delivery schedule(s) and completion of all performance issues. Finally, to grow your business successfully, you want a satisfied and happy client before payment is made to the vendor. How can these three goals be met? The answer is to build a relationship with a Financial Institution and offer the vendor payment through the use of an Escrow Agreement.
Escrow Agreements serve many important needs for your Business:
1) It assures the vendor that when you get paid, they will get paid.
2) It makes sure the vendor meets all of their obligations prior to receiving payment for their product(s) and/or services performed.
3) In the case of government orders, it keeps your cash flow liquid, since the financial institution is responsible for paying the vendor, once they receive payment from the government.
4) It helps build confidence with the vendor that your business has the means to meet financial obligations.
5) It helps to establish and/or build on personal banking relationships which could be very helpful in future business transactions.
How does an Escrow Agreement work?
An Escrow Agreement works by having your Company and the Vendor/Supplier agree to a document that lists the Contract and/or Purchase order for the supplies and/or services. Both parties agree to establish a specific account with the financial institution allowing them to receive the monies once they are paid by the customer. The customer agrees to remit payment to the financial institution. The financial institution agrees to make payment to you and the vendor within a few days of receipt of the payment and when they receive acknowledgement from you that all products and/or services have been completed in a satisfactory manner. The financial institution then provides statements as to payments received by the client and disbursements made. Upon disbursement of all the funds paid, the Escrow Agreement is usually completed and ends.
How much does it cost?
Normally an Escrow Agreement normally costs less than 1% of the total sales amount and usually involves the cost of setting up the account and fees for disbursing the monies. These charges are normally part of the terms and conditions of the Escrow Agreement. Once you design an Escrow Agreement with the advice of legal counsel (strongly recommended), the Escrow Agreement will cover over 90% of the normal terms and conditions for most future Escrow Agreements.
How else can an Escrow Agreement help me?
An Escrow Agreement can also help you in the purchase of expensive goods and/or services for your business by providing a guaranty that the purchased goods or services performed are fully met. A good example would be a Company purchasing a large computer system for your business, but wanting to make sure it operates and functions as promised. An Escrow Agreement for a purchase such as this would set parameters (or milestones) for payment based on the conditions for payment provided in the Escrow Agreement. Normally, your financial institution can use your credit line funds in the Escrow Account to ensure the vendor that once the terms and conditions of the purchase are met, they will receive payment.
How do I get started?
Contact your financial institution and speak with your personal account representative. I have found that the smaller community banks are much more responsive than the national or regional Mega Banks. Also, having the Escrow Agreement through your own financial institution provides you with a direct point of contact if you have any questions on the progress of the Escrow Agreement. The financial institution can work with you to answer your questions on the Escrow Agreement and refer you upon request to legal counsel that can make sure the Escrow Agreement is properly prepared and executed.
Video & Telecommunications, Inc. is Certified as a Small Disadvantaged Business Concern by the Small Business Administration. Peter Bianchetta can be reached at: 703-658-0304. |
