Benefits of Settling Milestone Payments in an Escrow
When hiring contractors or freelancers to work on a long-term project for your business, it is common practice to give out payments to them overtime via milestone payments. Milestone payments are called as such since they’re delivered in lump sums once the contractor or freelancer has completed a certain percentage of the project, or ‘milestone’. These payments may be transacted via escrow due to the benefit that can be derived from conducting milestone payments this way.
Considering that other payment methods such as payment links are faster and easier to use for transactions, what benefits does escrow offer in settling milestone payments?
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What are Escrow and Milestone Payments?
To understand the benefits of conducting milestone payments with escrow, it is important to understand what they are to avoid any confusion since knowing what they are is key to knowing what benefits one offers to the other.
Escrow, despite its attachment to finance and transactions, has more in common with legal matters than it does with commerce¹. More accurately, the legal aspect of commerce. This is because escrow is a legal arrangement whereby a third party acts as an intermediary between the transacting parties by holding onto the money or product to be transacted until a certain condition is met, which usually is in the form of an agreement between the parties. This third party is expected to be neutral and trustworthy, hence the existence of platforms that offer escrow services, such as Tazapay.
However, in practice, escrow may also be referred to a method of payment in which the money from the buyer is being withheld from the seller by a third party until the seller fulfils a certain obligation based on a form of agreement between them. In eCommerce, this may be in the form of ‘buyer protection’ where the online platform in question holds off from giving a customer’s money to the vendor until the customer has confirmed and verified the satisfactory delivery of the product bought.
Milestone payments, on the other hand, refer to the delivery of payments to contractors or freelancers in lump sums based on the achievement of a certain threshold of progress in a project, also known as a ‘milestone’ as briefly touched upon earlier. The amount paid is usually dependent on the amount of tasks, or deliverables, completed per milestone as agreed upon by both the service provider and their client².
Already, we can see the similarities between escrow and milestone payments since both involve a certain condition to be met before payment is delivered, which can greatly complement each other when used in tandem. It also helps that there is a significant overlap between the benefits of each.
What are the Benefits of Settling Milestone Payments in an Escrow?
As previously mentioned, there is a significant overlap between the benefits of milestone payments and escrow. Of course, they both have advantages unique to themselves but understanding this overlap can lead to a deeper understanding of the benefits of settling milestone payments in an escrow.
The shared benefits of both milestone payments and escrow are as follows:
- Builds Trust with the Seller/Provider
Milestone payments do this by having the buyer/client set up the payment structure with clearly defined milestones with established deliverables and acceptance criteria, giving the seller/provider confidence and assurance that they will be compensated for their work as the project progresses.
Escrow, on the other hand, requires both parties to come to an agreement before the transaction could even begin, thereby establishing this mutual trust that is upheld by the agreement, and the escrow chosen to withhold and release funds.
- Minimises Risk of Fraud
In the event where the seller/provider fails to produce the deliverables needed, or has produced the deliverables in an unsatisfactory manner, milestone payments protect the buyer/client by only having them pay the seller/provider for deliverables made that are up to the buyer/client’s satisfaction.
Similarly, escrow provides this protection with the agreement that is required to be made and upheld, and also with a stringent verification process that ensures that the deliverable is acceptable and completed on time before releasing the funds.
- Maintaining Cash Flow
While not as secure as a salary, milestone payments ensure that the seller/provider has a steady stream of cash to provide for themselves throughout the duration of the project with the condition that the deliverables must be completed. The same can be accomplished with escrow as the payment for a long-term project can be released in lump sums to the seller/provider over time as long as the item delivered is in accordance with the agreement signed by both parties.
- Reduce Risk of Non-Payment
When being hired to work on long-term projects, there is always the risk that the buyer/client might refuse to pay for services rendered or pay less than what was initially agreed upon. Milestone payments help reduce this risk by ensuring that the buyer/client has at least some payment to walk away with should there be any disputes with the buyer/client down the line. Similarly, the fact that the escrow acts as the intermediary third party in charge of withholding and releasing payments in accordance with the agreement signed by both the buyer/client and seller/provider, means that the seller will still get paid their dues and the buyer will also keep their money in the event of a falling out between them.
Given these shared benefits between milestone payments and escrow, settling milestone payments in an escrow would not necessarily create new benefits so much as improving upon the overlapping benefits between them. This is because the legal nature of escrow can add a layer of security and accountability to both the buyer/client and the seller/provider, thereby making the benefits listed above better than if they were separate. The benefits of milestone payments themselves can also be made simpler to implement with an escrow since the escrow can handle the release of payment in accordance with a provided milestone scheme, therefore helping in fostering trust between parties.
To conclude, the benefits of settling milestone payments in an escrow are the increased security and accountability to both parties provided by the escrow, and the role of the escrow as a third party intermediary aiding in improving trust between the buyer/client and the seller/client.
Now that you know more about the benefits of giving out milestone payments with an escrow, you are better prepared in looking for an escrow service that could serve your own needs. If you are interested in an escrow service, why not consider Tazapay? With operations in over 173 countries, fully digital, and easy to set up with no hidden fees, Tazapay escrow may well be the escrow service you’re looking for.
Benefits of Settling Milestone Payments in an Escrow
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