Using escrow for high-value online sales
When a shop selling jewellery, art or other high-value items online should use escrow, and how to invoice and record the payment escrow releases.
By Achekam · · 5 min read · For Retail businesses in South Africa, Nigeria, Kenya
A jeweller in Lagos receives an enquiry through Instagram from a buyer in Nairobi who wants a custom gold pendant. The buyer is happy with the price but nervous about sending a large sum to a shop they have never visited. The jeweller is equally nervous about posting a valuable piece to someone who has not paid. Both are right to be cautious.
This is the situation escrow was invented for. A neutral party holds the money so that neither side has to trust the other first. This article explains what escrow is, when it suits a shop selling high-value goods online, and how the sale and the eventual payment should be recorded in the shop's books.
What escrow is, and what the agent does
Investopedia defines escrow as a legal arrangement in which a neutral third party holds funds or assets for two other parties until the conditions of their transaction are met. It explains that the escrow agent's role is to manage and disburse what it holds according to predetermined contractual obligations or appropriate instructions.
So the escrow agent is not the shop's bank and not the buyer's bank. It is a referee holding the stake. Investopedia defines an escrow disbursement as a payment made out of an escrow account, and notes that money, securities, funds and other assets can all be held in escrow. For a shop, the disbursement that matters is the one that pays it for the goods.
When escrow suits a shop
Investopedia says online escrow services hold a buyer's payment until the product is delivered and checked, charge a fee for the service, and are best suited to high-value items such as jewellery or art.
That points to a simple test. Escrow is worth considering when:
- the item is valuable enough that the escrow fee is small in comparison;
- the buyer is new to the shop and has no reason to trust it yet;
- the sale is remote, so the buyer cannot inspect the item before paying;
- the shop cannot afford to lose the item if payment goes wrong.
For everyday sales of modest value, escrow adds cost and delay that the shop's normal payment methods do not.
Cross-border sales
Investopedia gives the example of an international seller whose buyer places the payment in escrow, with instructions to release it to the seller once the goods arrive in a suitable state, so that both parties are protected. Sales between South Africa, Nigeria and Kenya, or further afield, are exactly where that protection helps: the buyer cannot easily pursue a seller in another country, and the seller cannot easily recover goods from one.
Read the escrow service's terms closely before agreeing to use it, especially on three points: who pays the fee, what counts as the buyer accepting the goods, and how long the buyer has to raise a problem. Investopedia's explainer on how escrow works covers how a neutral third party holds money until both sides perform.
Agreeing the conditions with the buyer
Escrow only works if both sides agree in advance what "delivered and checked" means. For a high-value item, put these in writing before the buyer pays into escrow:
- A description of the item precise enough to settle an argument: metal, weight, stones, dimensions, certificate or provenance.
- How it will be shipped, insured and tracked.
- How long the buyer has to inspect it after delivery.
- What happens if the buyer rejects it: return shipping, who pays, and in what condition it must come back.
Photographs of the item, taken just before packing, are worth keeping with the order.
Recording the sale and the payment
Escrow changes when the shop receives the money, but not what the shop sold. The cleanest pattern is to invoice when the order is confirmed and record the receipt when the escrow agent releases the funds.
Invoice at confirmation. In Achekam, a business creates customer invoices as drafts it can change or delete. Issuing one takes the next number in its sequence and posts it to the ledger as debtors, sales and output VAT. Once the buyer and the shop have agreed the terms and the buyer has paid into escrow, issue the invoice. The amount sits in debtors while the escrow agent holds the money, which is accurate: the buyer has committed, but the shop has not been paid.
Receipt at release. When the escrow agent disburses the money, the shop records the payment against the invoice. A business records customer payments against one invoice or spread across a customer's invoices; a part payment leaves the invoice part-paid, and any extra is held on the customer's account. If a sale is cancelled and the money goes back to the buyer, the invoice needs to be dealt with too, not left in debtors.
This keeps the sale, the debtor and the receipt in one place, so the shop's invoices and payments reach its books without being captured twice. For orders that come in through messages and social media rather than a website, see online orders without a storefront.
The fee and the bank statement
If the escrow fee is deducted from the amount released to the shop, the money that arrives in the bank will be less than the invoice. That difference is a cost of making the sale, and it should be recorded as such rather than left as a mystery balance on the customer's account. Agree the exact treatment with your accountant. Each business in Achekam has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off, so a dedicated account for escrow and similar selling fees keeps their total visible.
The bank statement is where the release is confirmed. Bank lines are matched by suggestion and a person accepts each match. A line not yet in the books becomes a suggested journal a person approves, and a reconciliation completes only when no difference remains or every leftover line is explained. When the escrow release appears, match it to the customer receipt, and make sure the fee is accounted for so nothing is left unexplained. Marketplaces that pay out net of their own fees raise a similar question; see marketplace payouts.
Before your next high-value online sale, write a one-page set of escrow terms covering the four points above, and add an escrow fees account to your chart so the first release has somewhere to go.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
