Escrow is a tripartite agreement where two parties are involved in transaction/trade/business and third party is neutral party. Neutral party holds the funds/assets until the trade conditions are complied between both the transacting parties. It reduces the default risks from either buyer or seller. Will understand same by taking an example.

In our last example where miller went to financier for finance against the receivables. Here financier to strengthen his position can ask the miller to setup and escrow account where all the money coming into millers account will be credited into escrow arrangement setup between miller and financier. Once the obligations of financier are completed the rest of money is transferred to miller’s account. For example, miller submitted the invoices raised for 10 Lakh and received the funds, now buyer will transfer the funds before end of stipulated credit period (15 days), the money will be credited into escrow account, financier will debit the principal as well his margin and rest of money will be refunded to buyer.

Here we see, the neutral party is a banking institution in case of our example. If we move out from agri-fintech domain the neutral party can be anybody from an exchange, trading house etc. Next time we will see what if our miller do not have high-quality receivables and is selling to small startups and local proprietors. Don’t sweat out, their is solution for the miller to get paid up quickly. Its Invoice Discounting will discuss it more in next post.