May 24, 2024

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Studying business science

How Escrow Service Helps in Export Import Trade

Escrow payment service ensures that seller gets paid for shipment
and buyer receives what has been ordered for. Thus, it reduces
potential risk of fraud by acting as a trusted third party that
collects, holds and disburses funds according to buyer and seller
instructions. Escrow services are provided by licensed and regulated
escrow agents.

Escrow is well suited for small to medium value merchandise or
intellectual property where conventional payment system (e.g.
letter of credit) is either unsuitable or un-economic. It is
typically used for items purchased on auction sites, small value
shipments, domain names, source code etc.

Tell me one good application of Escrow for Exporters

Exporters can use escrow for collecting payment of small export
shipment where buyer is unwilling to pay in advance and Letter
of Credit is an expensive option.

It is frequently used for first-time transaction where buyer and
seller are conducting business for the first time (consequently
mutual trust level low) and the value of shipment is small.

Another area is collection of payment for samples that exporters
send for approval. Still, a third area could be payment for domain
name or source code for service exporters, specially in software
export.

For exporter, escrow is safer than receiving payment through credit
card, as there is no scope for ‘chargeback’. For importer, paying by
credit card to an unknown party always entails some risk. A credible
intermediary can help buyer and seller to start business and build
trust in each other.

How Seller is Protected

The financial risk of seller in an international transaction is
greatly reduced in escrow payment as buyer has to deposit the
agreed value of shipment with escrow before seller ships the ordered
product. So, seller knows buyer has capacity to pay and has already
paid for the shipment.

How Buyer is Protected

Escrow service tracks the shipped merchandise and verifies that it has
been delivered to buyer. Buyer then has an inspection period to check
the merchandise and decide its acceptability. The seller isn’t paid
until the buyer accepts the merchandise, or the inspection period
expires.

What Happens If Buyer Refuses to Accept the Merchandise ?

Different escrow services may follow slightly different procedure
in this respect – I am describing below a typical one:

If the buyer is not satisfied with the merchandise, he/she can
inform escrow service that the goods will be returned to the
seller. It is now the responsibility of buyer to ship the merchandise
back to seller in good condition and pay seller his/her cost of
shipment.

The seller has an inspection period to verify that the returned goods are in original condition. After the seller has confirmed
the receipt and that the condition of the goods are to his/her
satisfaction, escrow will return buyer’s funds after deducting
seller’s shipping costs and the escrow fees. The seller will
then be reimbursed for his/her shipping costs.

So, in the instance of buyer refusing to accept merchandise, he/she
will have to bear the cost of shipping back the merchandise to
seller, reimburse seller his/her shipping cost and pay escrow fee.

If the buyer fails to inform escrow of his/her decision within the
inspection period – escrow service will make the payment to the
seller.