Several of the Latin American economies are considered emerging markets, and they offer excellent potential investment opportunities for foreign businesses.
However, when trading in unexplored markets, a main concern for foreign businesses is always: payment default on the side of the local business partner. Whether this means that your business partner in Latin America does eventually not pay for goods delivered of services provided, or that the partner defaults on a project you invested in.
A solution that may assist you in successfully closing a global transaction in Latin America, is running your transaction through an escrow arrangement, by setting up a so-called escrow account.
How does escrow work?
The role of the escrow agent explained
Here is how escrow works. The escrow service provider, as “escrow agent”, will receive, hold and disburse deposits on behalf of the seller and buyer; or investors, or lender and borrower, as the case may be. The nature of the transaction can be investment, the purchase or sale of goods or products, or engagement of services.
Buyer, seller and escrow agent enter into a so called “escrow agreement” and the escrow agent opens an “escrow account” in which the buyer deposits the funds.
The escrow agent will subsequently hold the funds until an agreed cutoff date, as set forth in the escrow agreement.
If the conditions in the escrow agreement have been met – that is to say, if the seller has complied with the conditions as agreed between buyer and seller, pursuant to the escrow agreement – on or above the cutoff date, the escrow agent will forward the funds to the seller, and the financial transaction is successfully closed.
If the conditions are not met ultimately on the cutoff date – so in case the seller does not comply with what has been agreed between buyer and seller – the funds will be transferred back by the escrow agent to the buyer, and the financial transaction is cancelled.
Escrow as tool to de-risk credit exposure in Latin America
The escrow agent acts solely as a neutral, trusted third party and does not have any other interest in the transaction as such. It protects the interest of both buyer and seller. It makes it possible for investors, buyers and sellers involved in international trade to substantially diminish financial risks, especially in those cases where there is no purchase on credit and / or a transaction is not covered under a credit risk insurance.
Therefore, escrow should be considered as a tool to de-risk payment default and credit exposure and should be taken in consideration by companies doing business in Latin America, in addition to other essential elements of best practices, such as credit insurances, receivables management, and debt collection.
Cobroamericas is a boutique service provider offering debt collection, credit consultancy and company research information services to international companies doing business in Latin America and the Caribbean.
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