Escrow accounts became widely known as part of the 2019 reform in the field of regulation of the primary real estate market. According to the latest data from the Ministry of Construction of the Russian Federation, the number of property developers working with banks under the escrow scheme has almost quadrupled since then.
The expediency of introducing settlements using escrow accounts is not limited to a particular industry. This tool is increasingly used to ensure the security of transactions in the field of public procurement. But the possibilities of escrow accounts are not exhausted by protecting the interests of the parties. Let’s take a closer look at what additional benefits this tool gives to a business.
Escrow account options
Escrow is a special account that is used to balance the risks of the customer and the contractor as part of the execution of the contract. When concluding a contract under 223-FZ, the customer opens such an account with an authorized bank and places a security deposit on it, usually in the amount of an advance payment or another amount stipulated by the contract. The money is blocked at the moment of signing the supply or contract agreement. The contractor gets access to the escrow account after fulfilling his obligations, for this it is enough to provide supporting documents in the amount stipulated by the contract. The fulfillment of the terms of the contract is controlled by the bank. This is the basic schema.
But there are additional options. The first, key option for the market, which allows you to support a supplier, is lending for the execution of a contract against an escrow balance.
Support the contractor
If the contractor needs credit funds to fulfill the contract, the customer can help the contractor increase their availability. To do this, the customer determines the amount of the deposit on the escrow account, and the contractor applies to the bank to consider the possibility of financing at a special reduced rate. There is only one condition – the contractor can apply for a loan in the same bank where the escrow account is opened. The interest rate on such a loan is subsidized by interest income on a deposit in an escrow account. In some cases, the rate can reach 0.1%. This option is especially in demand for suppliers in the SME segment, who are in particular need of affordable financing in the execution of government contracts.
You can earn on escrow
Another option for escrow accounts is the possibility of accruing interest on the balance, which the customer has the right to dispose of at his discretion.
The most obvious option is to receive income from the funds placed on the deposit. The rate depends on the term of the contract and the procedure for opening an escrow account provided for in the contract. Since the customer’s money is blocked for the duration of the transaction and falls out of the company’s turnover, this approach may be justified in order to maintain the rate of return.
Manage additional income
The customer can use the profitability of the deposit in the escrow account as an additional source of contract financing. With direct advance payment to the contractor, he loses this source of profitability.
He can also take it into account at the stage of preparing the terms of the transaction – in the calculation of the final cost of the contract. In other words, the cost of the contract can be reduced by the amount of interest that will be accrued on the deposit in the escrow account. This step will help the customer to attract a wider range of potential contractors.
Escrow to structure the deal
Consider a case from the practice of Sberbank.
Thus, escrow not only secured the transaction, but also created additional mechanisms for financing it.
Win-win-win, or all parties win
Advantages of an escrow account for the customer:
Benefits of an escrow account for a contractor:
The state is also in favor. Expanding access to public procurement provides business support: the idea of “growing” suppliers is developing, competition in the field of procurement is increasing, and the quality of supplied goods and services is improving. The implementation of the mechanism of self-funding loans supports the development of the banking sector, budgetary funds work more actively in the economy.
