What Is Escrow in Business Lending? | Business Lending Glossary

Definition

A neutral third-party arrangement in which funds or documents are held until all conditions of an agreement are fulfilled.

Explanation

In business lending, escrow accounts are commonly used in commercial real estate transactions to hold property taxes and insurance reserves, and in loan closings to ensure all conditions are satisfied before funds are disbursed. Escrow protects both parties by ensuring that money or documents are not released until contractual obligations are met.

Example

At the closing of a commercial property acquisition, the title company holds the loan proceeds in escrow and releases them to the seller only after confirming clear title and recording the deed.

Why It Matters

Escrow arrangements reduce transaction risk for both lenders and borrowers by ensuring funds only move when all agreed conditions are verifiably satisfied.

Frequently asked questions

Are escrow fees included in closing costs?

Yes, escrow and title fees are typically itemized within closing costs and disclosed to the borrower on the loan estimate before closing.