In just a few short months, Covid-19 has changed many aspects of life for all of us. Nowhere is this more apparent than in the market for Personal Protective Equipment (PPE) where average citizens and healthcare professionals around the world have struggled to obtain masks, gloves and other protective equipment in order to minimise exposure to the virus. Now, an Escrow Account offers a better supply chain financing solution to ease these delivery issues for buyer and seller alike.
With healthcare facilities stretched to the limit, the unprecedented demand for PPE cannot easily be met by existing supply chains. Many production lines in China and elsewhere have been repurposed in an attempt to meet the extremely high level of new orders. However, the global pandemic has caused chaos that has sometimes led to a mismatch between buyer expectations and the delivery capabilities of suppliers.
The situation has been complicated because there have been both ‘for profit’ buyers looking to leverage a high level of market demand and healthcare professionals with an urgent need to protect medical workers and patients under their care. In each case, buyers have been extremely rushed in their search for PPE suppliers and have not been prepared in advance with clear technical specifications, an understanding of realistic pricing or likely delivery schedules. For their part, manufacturers of Personal Protective Equipment have been overwhelmed by the sudden rise in orders and opportunistic factories are offering their production facilities to help meet the burgeoning demand.
Rapid-fire and ill-informed discussions between inexperienced buyers and sellers have already caused a great deal of unresolved issues and there are many stories circulating about disreputable middlemen pursuing profit at all costs; fake producer credentials purporting to meet US FDA requirements; test equipment delivered that simply doesn’t work; and money taken for orders that are never delivered (sometimes due to poorly worded or incomplete purchase orders).
All of this has created a profound loss of confidence between both parties – when, in fact, smooth running business relationships are significantly dependent on a high level of trust. When a relationship is new – as in the case of many orders for PPE during the Covid-19 crisis – trust between buyer and seller is in short supply. This is often simply because there is no history of earlier cooperation and frequently there is little information available about each counterpart.
Speed of response is vital in a crisis of this scale and so trying to overcome these barriers by dealing with traditional banking institutions or initiating a Letter of Credit is simply not a viable alternative. A faster, more efficient method is required. Fortunately, there is one approach that can vastly improve customer’s and supplier’s satisfaction and significantly speed the order handling process – by using an Escrow Account.
Set up by a reputable financial institution, an Escrow Account addresses the trust issue between counterparts by providing a significant comfort level to both parties: the buyer can deposit funds in the knowledge that they will only be released after the satisfactory production of goods has been confirmed. Meanwhile, the seller can start production safe in the knowledge that he will definitely receive payment, providing that the goods are produced to an agreed specification.
Working with an established third party Escrow Service Provider (or Agent) – a reputable financial institution authorised to hold and manage client monies – setting up a transaction is relatively quick and easy. The process is clearly outlined here.
Onboarding includes a due diligence procedure – Know Your Client or KYC – that ensures specific parameters are met for both counterparts – including Anti-Money Laundering (AML), sanction list restrictions and other requirements. Here an Internet-based platform such as Velotrade can use technology and a paper-free work flow that stringently avoids physical document exchange in order to execute the process much faster than a traditional institution such as a bank, where onboarding typically takes several months to complete.
With oversight from the Escrow Agent, a Mutual Non-Disclosure Agreement (NDA) and Sales Agreement are signed between buyer and seller to define all transaction details including product specifications, payment terms, IncoTerms, deposit amount, reference currency and delivery location.
Once the goods have been produced and the buyer has conducted a Quality Assurance Check to verify conformity against the Sales Agreement, the buyer instructs the escrow agent to release the funds from the segregated client account of a large commercial bank where they have been held on trust.
At the same time as monies are transferred to the seller, the buyer takes ownership and a freight forwarder collects the goods ready for customs clearance and shipment to the port of destination.
Whether you are a manufacturer or a buyer looking for a more efficient way to manage orders of PPE in the current Covid-19 crisis – or you are simply looking for supply chain efficiencies in other products manufactured in Asia – it is worth considering the use of an escrow account.
Velotrade’s escrow account service helps to ensure that new trade relationships operate smoothly, and with a fully digitised KYC process that uses electronic signature verification, it is easy to avoid the endless paper trail common among traditional banks. Contact us for more information.