Up-front fees

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UP-FRONT FEES Caveat emptor!

By Robert T. Koveleskie
President of Bizfin, LLC

In our newsletter and on our website we have warned our subscribers to be careful when up-front fess are requested when seeking capital. In some cases there may never be a valid intent to finance. There are mortgage brokers and even some lenders, especially on the Internet, who will rely on up-front fees for a primary source of income and seldom finance a deal.

DUE DILIGENCE IS A RESPONSIBILITY OF THE ENTREPRENEUR
Once a capital source is referred to the entrepreneur it is the responsibility and final judgment and decision of the entrepreneur to investigate the capital source and make a prudent decision to pay or not pay up-front fees before receiving financing proceeds. Absent a due diligence by the entrepreneur, the best advice is to not pay up-front fees. Even in the best cases, paying up front fees is in a sense like buying a lottery ticket. There's risk that your deal may not be funded. Caveat emptor!

USE CREDIBLE CAPITAL SOURCES
If you feel you have a credible capital source and you have done a due diligence on the source and a reasonable up-front fee is required (one percent of the loan amount) as a "good faith" fee, then the fee should be deposited in an escrow account that is approved by an experienced and qualified attorney. But, in no event should you pay an up-front fee to a broker.

Do your own due diligence
Don't rely on the broker or intermediary to do your due diligence. When an intermediary or broker refers you to another intermediary to help find capital, the second intermediary does not typically disclose all of the capital sources to whom he/she will be submitting your deal. Therefore, the first intermediary does not always have access to the lender until it is too late. A quick but preliminary due diligence can be done by typing names into Google. If there are repeated complaints you will be wise to carefully check out the sources of the complaints. If a broker's or lenders website has a testimonial section, check it out.

QUESTIONS TO ASK THE LENDER
Before even depositing a "good faith" fee you should ask what percentage of deals have they financed that have deposited a "good faith" fee? Has an entrepreneur ever lost a good faith deposit fee, if so, what were the circumstances? How recent have they closed a loan? Ask for references.

PAY NOW OR PAY MORE LATER
When doing due diligence on a lender or broker, you either can spend time and money doing a good due diligence or spend more later digging yourself out of a bad situation. In most cases problems could have been avoided if the entrepreneur had simply Googled the lender or broker. So, if you Google a prospective lender or broker and you see a page of complaints--Caveat emptor--you may want to look for another lender or another mortgage broker.

PUT YOUR EXPERIENCE TO WORK FIRST ON DUE DILIGENCE
If you are experienced enough to put a multimillion dollar deal together, then you should be experienced enough to know how to do a due diligence on brokers and lenders. If you have a fundable project, there are plenty of capital sources who will fund your deal without wanting up-front fees beyond an application fee or a small due diligence fee or an escrowed "good faith" deposit.

UP-FRONT EXPENSES A COST OF DOING BUSINESS FOR LENDER
Expenses beyond the application fee should be the cost of doing business for the lender. Due diligence costs should be built into the cost of the capital by the lender and added on with closing costs to be deducted from the proceeds of the financing. This add-on can then fund the cost of the due diligence on future projects that may be turned down. If the lender is experienced and knows the customer, then non-funded projects will be at a minimum. Few experienced entrepreneur would complain about paying a premium due diligence fee out of the proceeds of the loan. It's time for lenders to make some adjustments in their lending policies going forward.

UP-FRONT FEES NOT A DETERMINER
An up-front fee should not be a determiner for a legitimate capital source to finance a deal. It is a rare case when the quality of the deal does not prevail. Nor should a request for an up-front fee make a broker or a lender suspect. Although it should cause the entrepreneur to do a due diligence.

ASSESS THE VALUE OF YOUR OWN DEAL
You know the value of your own deal. If you know your deal is marginal and a capital source seems eager to finance it with little information and is asking for an up-front fee, Caveat emptor!