# Understanding Third Parties: Roles, Benefits, and Real-World Examples

![A small business owner shakes hands with a banker after purchasing new commercial property while an escrow officer looks on and acts as a witness.](https://www.investopedia.com/thmb/KAWLaBC82xpoceIjIyuLcbecOfY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WhatIsaThirdPartyHowTheirRoleWorksandExamples-b40b2b0dcaff41bc9fd92d9bd152c70e.jpg)

*— Frederic Cirou / Getty Images*

## What Is a Third Party?

A third party plays a crucial role in transactions by acting as a neutral participant to facilitate smooth operations. For instance, an escrow company protects the interests of all parties in real estate deals, and a collection agency aids creditors in recovering debts. These entities enhance operational efficiency and reduce risks, often through outsourcing certain functions to maintain competitiveness.

### Key Takeaways

*   A third party in transactions is involved but not a primary participant, often having a neutral or supportive role.
*   Escrow companies serve as third parties in real estate, holding funds and documents until all transaction conditions are met.
*   Collection agencies act as third parties to retrieve outstanding debts, working on behalf of creditors under specific agreements.
*   Smaller firms outsource operations to third parties to enhance efficiency, reduce risks, and cut operational costs.

## Understanding the Function of Third Parties

A third party may also refer to an entity that a company uses to mitigate risk. For example, small investment firms face difficulty entering the industry when large firms continue leading the competition. One reason large firms grow more quickly is because they invest in middle- and [back-office](https://www.investopedia.com/terms/b/backoffice.asp) infrastructure. To stay competitive, many smaller firms [outsource](https://www.investopedia.com/terms/o/outsourcing.asp) those functions as a method of gaining a greater share of the marketplace.

Small firms save time and money by leveraging scalable infrastructure with variable costs for trade operations, data storage, disaster recovery, and system integration and maintenance. By outsourcing middle- and back-office solutions, small firms can leverage technology and processes to achieve more efficient task completion, maximize [operating efficiency](https://www.investopedia.com/terms/o/operationalefficiency.asp), reduce operational risks, decrease reliance on manual processes, and minimize errors. Operational costs are reduced, compliance is enhanced, and tax and investor reporting improve.

## Third Party Examples in Real Estate and Debt Collection

### Real Estate Escrow Company

A [real estate escrow company acts as a third party](https://www.investopedia.com/terms/t/thirdparty_mortgage_originator.asp) to hold deeds, documents, and funds involved in completing real estate transactions. The company deposits the funds in an account on behalf of the buyer and the seller. The escrow officer follows the directions of the lender, the buyer, and the seller in an efficient manner when handling the funds and documentation involved in the sale. For example, the officer pays authorized bills and responds to the principals' authorized requests.

Although the escrow process follows a similar pattern for all homebuyers, the details differ among properties and specific transactions. The officer follows instructions when processing the escrow and, upon meeting all written requirements, delivers the documents and the funds to the appropriate parties before closing the escrow.

### Collection Agency

A company may hire a [collection agency](https://www.investopedia.com/terms/c/collectionagency.asp) for securing payment of company debt. Company invoices or initial customer contracts typically state at which time a collection agency may be used for securing outstanding payments. Some businesses can carry debt for years, whereas others expect payment within 90 days. The schedule depends on the market and the company's relationship with the client.

When a business would pay more in court fees than the amount of the debt itself, the company may utilize a collection agency's services instead of filing a lawsuit. The agency may pay the business 10% or less for each outstanding invoice, or it may agree to a large percentage of commission for recovered debts. The agency consolidates the company's debt and goes to work recovering the outstanding balances.

## The Bottom Line

A third party plays a crucial role in many transactions by acting as a neutral agent outside the primary transaction parties. Examples include escrow companies in real estate, which protect the interests of buyers and sellers by managing documents and funds. [Collection agencies](https://www.investopedia.com/terms/c/collectionagency.asp) also serve as third parties, helping creditors recover debts efficiently. In the business realm, outsourcing middle- and back-office functions to third-party entities allows smaller firms to compete more effectively by leveraging cost-effective and scalable solutions. Understanding the function and value of third parties can enhance transaction outcomes and operational efficiency.