Castler Escrow

Escrow: A New Way to Manage Supply Chain Risks

Today’s highly globalised business world faces unprecedented developments regularly. This impacts logistics companies significantly. An innovative and unique approach is required to solve the issues arising from unique and unforeseen circumstances.
Supply chain risks are volatile and highly unpredictable. From an American hacker to an earthquake in Japan, any unprecedented factor can disrupt the efficiency of a supply chain. Since the onset of the COVID-19 pandemic, the world is finding it exceedingly slow to gain momentum. In addition to this, companies are low on revenue and drowning in debt. This is bound to have a detrimental impact on different business functions, which impacts their future operability too. Supply chains are no exception.
The world is increasingly becoming more globalised. To counter the insufficiencies of the system, new suppliers are emerging across the globe. At the heart of impending supply chain crises lies a lack of dynamic processes for tackling unforeseen risks. As a consequence, one of the risks that has arisen is transacting with unknown parties. Despite several sophisticated attempts to reform the industry, unfair payment practices and the risk of insolvency continue to prevail. These pose major problems for those involved in logistics.
Common Supply Chain Problems
Concerns that may be faced by a business involving a supply chain are-
  • The seller’s primary concern is assurance of receiving payment.
  • The buyer’s concerns revolve around receiving deliverables in sound condition.
  • Atypical payment terms are also a possibility. Example – a supplier asking for up-front payments or proof of payment.
  • Last-minute price changes may make an order unviable.
  • Last-minute delays in shipments can disrupt other functions.
  • The Solution: Digital Escrow
    These problems can be solved efficiently with the help of escrow services. Escrow based payments have been around for a long time to give protection to parties involved in a transaction. Traditionally, setting up an escrow account has been a time-consuming and costly process. It has, therefore, remained restricted to certain domains like mergers, acquisitions, law firms, and real estate. However, with the advent of eEconomies, the use of escrow accounts has expanded to domains like supply chain as well. Escrow is an account with predetermined conditions for the release of funds and deliverables. A buyer can place their funds in the escrow account under the supervision of a third party and the seller can deposit the deliverables according to the defined terms. The third-party expends the funds to the seller and deliverables to the buyer only after all conditions decided upon have been met.
    As the translation is overlooked by a trustee until it is complete, the buyer is protected from fraudulent sellers since it gives the buyer a window to inspect the goods and/or services. The seller is protected from unexpected chargebacks and shipments are tracked to ensure that the buyer receives them. Additionally, due diligence taken by the counterparty, facilitation of payment in tranches and protection from insolvency are added advantages.
    A Global Solution Too
    Today’s ongoing crisis is imploring companies to look beyond conventional solutions to better manage risks and control liquidity. The scepticism surrounding transactions with unknown parties will forever be valid. The key is adopting novel strategies such as escrow facilities to execute and manage risks efficiently.

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    Read More: Escrow Accounts versus Current Accounts and Nodal Accounts