Escrow: a self-employed freelancer’s guide to using escrow in 2022
If you’re a freelancer, there’s every chance that you’ve been given a lot of (largely unsolicited) advice about money. Not just what you should charge, but when and how!
Everyone has different views about navigating that tricky path between client-trust and ensuring that you actually get paid. Well, one of the more recent solutions is escrow, writes JJ Rathour, founder of WondaPay, a platform providing superfast payments to freelancers.
But what exactly is escrow? How does it help freelancers and their clients? And what should freelancers know about escrow in 2022?
Escrow: a definition, and what escrow means for freelancers
An online dictionary definition of escrow is:
‘A bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled.’
What this means -- in real life for freelancers and their clients -- is that escrow is a type of security.
A fee is agreed for a specified piece of work. The client pays that fee into an escrow account, and cannot withdraw it without the freelancer’s approval. But nor can the freelancer access it until they have completed the agreed work to the agreed standard.
In short, an escrow account is a secure financial ‘holding bay’ for people who wish to do business together.
How can escrow help freelancers in a self-employment setting?
Trust has always been important in the freelancer-client relationship. Traditionally, that relationship relies on one party taking a risk. Trusting that the other will uphold their side of the agreement. There’s always the potential of someone taking something for nothing!
Working with an escrow provider removes that risk. While, technically, the buyer pays their fee upfront, they know that the seller will be unable to access those funds until the work is done. Which means that there’s no option for easy money. Both parties are assured of their positions, and work can progress with trust on both sides.
And as a side benefit of using a good escrow service, freelancers usually get to access their fees far more quickly. As soon as the job is marked as ‘complete,’ the funds will be released. This is obviously preferential and speedier to the self-employed than seemingly endlessly chasing invoices. It also foregoes all the stress, awkwardness and cost that can hunting down late payers can bring!
Are there any pitfalls to escrow usage for freelancers?
The main problem that can arise when managing your payments through escrow is that you come to an impasse. You think that you’ve fulfilled your side of the agreement. Your client does not. They’re not willing to release the funds to you. And you certainly are not prepared to release the funds back to them! So, the money just sits there and waits.
It’s a scenario that could occasionally arise. But most of the best escrow services offer mediation. And in a situation where no one wins, both parties tend to be more willing to negotiate. Particularly if you work with an escrow service that allows user feedback.
If your feedback has the power to materially impact the client’s ability to attract freelance talent in the future, and their feedback has the power to deter other businesses from working with you, disagreements are more readily resolved. Such a feedback feature can also bring the added bonus of helping you, the freelancer, reach new clients.
Yet there can also be the issue of payment. Any third-party service will require a service fee. This is typically a percentage of the money they are helping you to hold. Every service is different, and fees can range from 3% to 30%!
So, before deciding to work with an escrow service, you need to read the small print and check out the competition. Losing 3% of your revenue for peace of mind is usually worth it. But 30% is much more difficult to justify!
What’s the future of escrow in the freelance marketplace?
The covid-19 pandemic has changed the way a lot of businesses work. In fact, more SMEs have turned to freelance talent. While this is great news for the freelance sector, it does seem to put greater impetus on the need to ensure a simple, regulated payment infrastructure. And right now, escrow seems to be the safest avenue. It’s tried and tested, having been deployed in various other scenarios (including property transactions) for years. Although it won’t be right for everyone, and it doesn’t remove every difficulty, the escrow system does help to mitigate the potential payment pitfalls of the freelance working model.