Escrow Account or Bank Guarantee

Escrow Account or Bank Guarantee: Which Solution to Secure Your Commitments?

In an uncertain economic climate, securing financial commitments is more essential than ever. Whether for fundraising, a real estate transaction, or a commercial contract, parties want to ensure that obligations will be fulfilled.

Two mechanisms frequently come up in negotiations: the escrow account and the bank guarantee. Both aim to ensure fair execution of commitments, but their logic and implications differ significantly.

Escrow Account: Neutrality, Transparency, and Clear Conditions

An escrow account is a blocked account managed by a trusted third party, where funds are held until a condition defined in the contract is met.

Example: In a business sale, funds may remain blocked until the final signature, the lifting of a suspensive clause, or the achievement of a key milestone.

Key Advantages:

• Contractual flexibility: release conditions are freely negotiated
• Lower risk for the debtor: nothing is released unless conditions are met
• A neutral framework that reassures both parties, especially in sensitive situations

Points to Consider:

• Funds must be available from the outset
• A clear and precise escrow agreement is essential to avoid deadlocks in case of disagreement

Bank Guarantee: The Security of an Irrevocable Commitment

A bank guarantee, or first demand guarantee, is a commitment by a bank to pay a specified amount to the beneficiary if the debtor fails to meet their obligations.

Its main advantage? The beneficiary can request payment without having to prove the debtor’s fault.

Example: It is commonly required in public contracts to guarantee proper execution or the repayment of an advance.

What It Offers:

• No need to immediately tie up cash
• Strong legal security for the beneficiary
• Quick activation in case of default

Drawbacks:

• Higher cost (fees, commissions, collateral required by the bank)
• Significant risk for the debtor: the bank can pay upon simple request, even in case of dispute

Which Tool for Which Situation?

Choose an escrow account if:

• You already have the funds available
• You want to manage a step-by-step operation (delivery, milestones, validation…)
• You prefer a negotiable contractual framework without involving a bank

Opt for a bank guarantee if:

• You need to reassure a particularly demanding party
• You don’t want to immobilize your cash flow
• You operate in a regulated environment (tenders, public contracts, construction…)

In Conclusion: Often Complementary Mechanisms

Escrow accounts and bank guarantees are not mutually exclusive. They are complementary and can be combined in more complex arrangements.

For example: An advance can be secured via a bank guarantee, while the balance remains in escrow until certain conditions are met.

The best strategy is to choose the tool — or combination of tools — that best meets your needs in terms of trust, timing, and cash flow.

And you, which solution do you use to secure your sensitive transactions?