What is Escrow? How Does Escrow Work for Freelancers?
What is Escrow?
Escrow is a legal concept whereby assets are held by a trusted third party while the other two parties complete a transaction. It’s commonly used in property sales: While Seller Sandy and Buyer Bob are finalizing the sale, Trusty Tim holds on to the money and keeps everyone honest. When the sale is complete, Trusty Tim releases the money to Seller Sandy.
You might have heard that Apple paid €14 billion in back taxes into an escrow account. In 2016 the European Commission ruled that Apple received unfair tax incentives from Ireland. Apple disagrees. While the two are busy arguing about it in the courts, the money in question is being managed by Goldman Sachs.
Where Does Escrow Make Sense?
Example 1: Renting out your spare room on Airbnb
Imagine you’re renting out your spare room on Airbnb and you have to send an invoice after each guest. To Mexico, Finland and Texas, hoping they’ll remember to pay you.
Example 2: Selling things online
How about if you’re selling your collectable-edition of Sting CDs online? Would you really want to drop it off at the post office with an invoice attached? Chances are you’ll be sending reminder messages in case the lucky buyer isn’t prompt on paying.
That's Why Escrow Is so Important:
To give both sides of the deal security, a third party comes into play. They hold a buyer’s money until the seller has delivered a good or service. Then they release that money.
Airbnb holds a guest’s money until they’ve checked in; eBay holds that Sting enthusiast’s money until the CDs arrive.
That means buyers don’t have to pay up front without seeing what they’re getting. And sellers don’t have to cross their fingers hoping to get paid at the end of the day.
I Know I've Heard of Escrow Before...
Yep. You’ve probably seen the note plastered on “House For Sale” signs. In Escrow.
That means the buyer is ready to buy the house and has given the money to a third party during final negotiations.
If Seller Sandy is selling her house to Buyer Bob, she wants to know the money is there before she signs away her rights. Buyer Bob, on the other hand, isn’t going to hand over the money until all is said, done and signed.
That’s why the Escrow Agent or Broker holds on to Buyer Bob’s money until Seller Sandy hands over the deed to the house, then he releases it to Bob.
What Else is Escrow Used For?
If you can sell it, chances are someone has used escrow to pay for it. Art, tickets, houses, lamp shades. The list is endless.
Maybe it was called something else. Escrow sounds intimidating and a lot of business talk around the term and call it “buyer and seller protection” or some variation on “secure payment system.” At the end of the day, it’s all about getting buyer and seller a fair deal.
How Does Escrow Work for Freelancers?
If you’re buying or selling work, you should have the same right to payment protection than if you’re buying or selling CDs. Or renting out your spare room.
That’s where Trustfy comes in.
Say this time, Sally is creating a promotional video for John’s bakery. John doesn’t want to pay Sally until he’s seen the video. But Sally doesn‘t want to create a gorgeous video for John and then hope he’ll pay her once he has it.
With Trustfy, John pays in to a secure account and the money is held while Sally works. Once the video is complete, John authorizes the release to Sally.
John doesn’t have to blindly trust Sally, and Sally can work with confidence knowing she’ll be paid!
Advantages of Using Trustfy
For John, that means he has: Quality of work protection, late work protection and payment protection- so there’s no chance Sally will just run off to Bali with his money.
For Sally, that means she has: Late payment protection, cancellation protection and payment protection- so there’s no chance John will just use her video and pay *later*
Read more: Stop calling it the gig economy, it’s the future of work.