Its not uncommon for business financing intermediaries to charge up front fees or engagement fees to take on a file where financing is required.
From a business owner or business manager point of view, is this a good business practice or one to stay away from?
Like anything else, payment of money should be related to value received.
On the one hand, business owners will argue that they should never have to pay engagement fees or up front fees for financing as there is no way to know for sure if 1) the business financing intermediary is not a scammer making money collecting fees; or 2) the intermediary or business financing consultant, or broker has a pre-established lending source they have pre qualified your application with.
From the consultant or broker or intermediary’s point of view, the flip side of the argument is, how can I engage in locating financing for a business if they are 1) not monetarily committed and invested in the process (i.e. how badly is this deal being shopped around) and 2) not prepared to either provide a proper financing package, don’t know what a proper financing package is, don’t know why its important to securing business financing, and/or don’t want to pay someone else to spend the necessary time to put one together.
These up front fees or engagement fees are a risk and a cost that may not lead you to the financing you desire, despite the best efforts of fully qualified and reputable intermediaries.
But, not considering these engagements may also restrict your access to business financing sources that may very well be able to invest in your business.
Once again, we go back to value received.
Personally, I only charge up front fees if there is a substantial amount of work for me to complete in order to be able to properly present a case for financing to a qualified lender. If the client is prepared to provide me with everything I need, I’ll work without an up front fee provided I feel comfortable with the applicants commitment to the process I’ve outlined to them.
At the same time, I’m not going to spend 20 plus hours (in some cases 100 plus hours) getting a proper package together without some form of compensation. And in terms of value received, whatever I put together is provided to the client. The package is based on their confidential information, but the presentation and organization is my intellectual property. If you want it, you have to pay for it.
There are many reputable intermediaries that won’t enter into any engagement without an engagement fee as they only want to deal with the most serious clients who understand the risks of broadly shopping a deal.
There are also many arguments for and against these fees. In every case, you have to take a buyer beware mentality, perform all the due diligence you feel necessary to validate the intermediary and their stated approach, and be prepared to lose the money (don’t use your last dollars to enter into one of these engagements) as there is never a guarantee that a financing arrangement will get funded, no matter what you’re being told at the outset.