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I have an applicant asking for a $500,000 line. They told me their financial condition is weak as a result of a bankruptcy of a major customer following the attack on 9/11, but they have offered the opportunity to become a participant in a Purchase Proceeds Escrow Agreement operated by a law firm. As I understand it, the process works this way: The customer / applicant purchases merchandise from us. It deposits money from the sale of goods in the ordinary course of business into this escrow account managed by its attorney. The attorney remits payments from the escrow account. I am not comfortable with this arrangement, but the sales department wants specific comments and concerns. What do you think?

Answer: I agree with you. The fact that there is an escrow account does not ensure payment. The fact that an attorney is involved does not guarantee funding into the escrow account. The obvious fact that the debtor is responsible for funding the escrow account means that the debtor may choose not to fund the Purchase Proceeds Escrow fund, or they for any reason elect not to report your company’s open invoices the ‘fund’ manager.

I think of this as a cute idea. There are hints of payment but no guarantees. There is an attorney involved, but your company is not their client and the attorney makes no representations that your company will ever be paid. I think if the applicant is not creditworthy absent this escrow arrangement that you should not offer open account terms.

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