Reviewed by Feb 19, 2021| Updated on
A third party is an entity or an individual who gets involved in a transaction; however, it is not part of the principals and displays lesser interest. For example, when the escrow firm acts as a neutral agent in a real estate transaction by collecting money and the required documents that a buyer and a seller exchange during the completion of a transaction.
Another example, when a debtor owes a sum of money to the creditor and has failed to make the scheduled payments, it's likely that the creditor is going to employ a third party in the form of a collection agency to make sure that the debtor complies with his agreement.
Companies may choose to use third parties to mitigate risk. For example, small-sized investment companies face challenges to enter the industry since large-sized firms continue to give tough competition. One of the reasons large-sized firms grow faster is because they choose to invest in middle/back office infrastructure. For staying competitive in the market, several small-sized firms outsource such functions in order to gain a bigger share of the marketplace.
By outsourcing middle/back office solutions, small-sized companies take enhanced benefit out of technology/processes for more efficiency in completion of tasks, for maximum operating efficiency, for reducing operational risks, for decreasing manual processes and bring down the errors. Operational costs come down, compliance improves, and tax/investor reporting gets better.
A third party will function on behalf of one/more individuals who are involved in a transaction. For example, in a real estate transaction, an escrow firm will work for protecting all parties who are involved in a transaction.
In the case of debt collection, a third party company partners with the lender to make sure the outstanding debt is recovered as much as possible. Third party may outsource a few functions to an outside firm to make sure there is high efficiency in services which are rendered to clients.