Escrow Agreement

How an Escrow Agreement Works in Business Lending

In small business lending, an escrow agreement establishes the rules governing how a neutral third party — typically a title company, attorney, or licensed escrow firm — manages funds during a loan transaction. The agreement spells out what conditions must be satisfied before funds are released, who bears responsibility for costs during the escrow period, and what happens if the deal falls through. Lenders most commonly require escrow arrangements in commercial real estate transactions, business acquisitions, and SBA-backed loans involving property. For example, an SBA 7(a) loan financing a commercial property purchase may require the borrower to deposit earnest money into escrow — often ranging from 5% to 10% of the purchase price — while appraisals, title searches, and underwriting are completed. The escrow agent does not take sides; their sole responsibility is to follow the written terms of the agreement to the letter, protecting both the lender and the borrower throughout the process.

Different loan types involve escrow agreements in distinct ways. SBA lenders, who operate under U.S. Small Business Administration Standard Operating Procedures, frequently mandate escrow for property purchases, business acquisitions, and environmental remediation holdbacks. Conventional bank term loans secured by commercial real estate almost universally include escrow for property taxes and insurance, sometimes requiring monthly deposits into an impound account held by the lender. Community Development Financial Institutions, known as CDFIs, may use simplified escrow structures to reduce closing costs for underserved borrowers. Online lenders and merchant cash advance providers, by contrast, rarely use formal escrow agreements because their products are typically unsecured and close in days rather than weeks. Credit unions handling commercial mortgages generally follow a bank-like escrow model, requiring ongoing tax and insurance reserves held in a dedicated account throughout the life of the loan.

What Business Owners Should Do About an Escrow Agreement

Before entering any loan transaction that involves an escrow agreement, business owners should take several proactive steps. First, request a complete copy of the escrow instructions before signing anything — these instructions are the operational blueprint of the agreement and govern every action the escrow agent can take. Second, confirm that the escrow agent is licensed and bonded in your state, as requirements vary by jurisdiction. Third, identify all conditions that must be satisfied for funds to be released, such as satisfactory appraisals, clean title reports, or environmental clearances, and build realistic timelines around them — many SBA real estate closings take 45 to 90 days from application to funding. Fourth, budget for escrow fees, which typically run between USD 500 and USD 2,000 for small commercial transactions, depending on complexity. Finally, work with your lender or broker to clarify who controls the escrow instructions and under what circumstances funds can be returned to you if the deal does not close, so you are never caught off guard.

Navigating escrow requirements on your own can be confusing, particularly when comparing loan products across lender types with very different closing processes. We connect you with lenders — we do not lend — which means our role is to match your specific transaction, property type, and loan size with lenders whose escrow and closing processes align with your timeline and budget. Whether you are purchasing a commercial property with an SBA 504 loan or acquiring a business through a structured asset purchase, we help you find the right financing partner from day one.

Sources: SBA.gov, Federal Reserve 2023 Small Business Credit Survey, CFPB, FDIC. Small Business Loans Today is an independent affiliate publisher — not a lender or broker.