Trading internationally comes with huge potential for growth, however it can also be associated with higher levels of risk, over and above that of trading domestically. One of the big risks can be getting paid, but it doesn’t have to be that way.
There are a number of ways you can reduce this risk including letters of credit, insurance, and advance payment. There is also a method that combines low risk with ease and low fees that is set to grow in use, especially as we navigate a post-covid global downturn. That method is the use of an escrow facility.
Escrow is where a buyer passes payment for an order to a third party who holds the funds until agreed conditions are met. Once the buyer has confirmed that all terms have been met (delivery, quality, accuracy etc), the third party releases the funds to the seller. It benefits both parties: the seller can be confident that the commitment to buy is genuine and that funds are in place before they despatch their goods, and the buyer can be confident that the agreed terms will be met before the funds are released.
The coronavirus pandemic has been challenging for businesses around the world, with most taking some kind of financial and operational hit. The risk of non-payment is therefore even higher than any time previously. Even trading with existing partners, with whom you have a strong relationship, payment cannot be guaranteed as businesses who were viable and successful could find themselves in a difficult position.
Once funds are in escrow, they are ring fenced for that order and protected against insolvency, giving the seller confidence to despatch the goods. Verification checks take place on both parties, fulfilling an element of due diligence and ensuring that both businesses are ‘real’ with a genuine intention to trade. This can help eliminate fraud and/or human error. Funds can also be released in stages as tranches of work are completed.
Although escrow services have been around for quite a while, they have traditionally been set up only by banks or lawyers. This could be quite complex and lengthy to set up. New providers, such as Shieldpay, are able to set arrangements up very quickly, often in just 48 hours (as opposed to up to 6 weeks with a bank). As you would expect, fees are cost effective due to the simplified process and it can be done with or without the help of lawyers. A fully transparent digital platform means that all approved parties can check the status of funds as well as upload and access documents relating to the deal, such as invoices, terms, proof of delivery and more.
An escrow arrangement can be beneficial for transactions of any size when there an element of risk involved, and particularly to small to medium businesses whose transactions may be less tolerant to high fees and long lead times.
Shieldpay is an ecosystem partner to Open Borders Direct and is available to all subscribers.
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