Third Party

Understanding Third Parties

A third party is an entity involved in a transaction or business relationship that is not one of the principal parties. Third parties typically act as neutral participants or service providers to facilitate transactions, reduce risk, and handle specialized functions that the primary parties do not perform themselves.

Key takeaways

• A third party participates in a transaction without being a principal, often in a neutral or supportive role.
• Escrow companies are common third parties in real estate, holding funds and documents until contractual conditions are met.
• Collection agencies act as third parties that recover outstanding debts on behalf of creditors.
• Businesses—especially smaller firms—use third-party providers to outsource middle- and back-office functions, improving efficiency and cutting costs.

What third parties do

Third parties perform a variety of roles that support or complete transactions:

• Serve as neutral custodians of funds and documents (e.g., escrow).
• Recover debts or enforce payment obligations on behalf of creditors (e.g., collection agencies).
• Provide outsourced infrastructure and operational services—such as trade-processing, data storage, disaster recovery, and system integration—to help firms scale and remain competitive.
• Reduce operational risk, improve compliance, and lower the likelihood of manual errors by using specialized processes and technology.

Common examples

Real estate escrow companies

Escrow companies hold deeds, documents, and funds during real estate transactions. An escrow officer follows instructions from the buyer, seller, and lender to ensure bills are paid, documents are processed, and funds are released only after all contractual requirements are met.

Collection agencies

When a business cannot efficiently recover unpaid invoices, it may engage a collection agency. Contracts or invoices typically specify when a debt may be handed to collections. Agencies may purchase debts for a small percentage of their face value or work on commission, pursuing outstanding balances so the original creditor avoids legal or administrative costs.

Benefits for businesses

Outsourcing to third-party providers offers several advantages:

• Cost savings through variable, scalable infrastructure instead of fixed in-house systems.
• Faster access to specialized technology and operational expertise.
• Improved operational efficiency and accuracy by reducing manual processes.
• Lower compliance and reporting burdens, with better tax and investor reporting support.
• Reduced capital and staffing demands for middle- and back-office functions.

Bottom line

Third parties play a vital role across transactions and business operations by providing neutrality, specialized capabilities, and scalable services. Whether protecting funds in escrow, recovering debts, or handling back-office functions, third-party providers help organizations reduce risk, control costs, and operate more efficiently.