The question as to whether or not you should consider paying these fees is a difficult one to answer for a number of different reasons.
On the dark side of the equation, yes up front fees are a perfect opportunity to be scammed by either someone who has no intention or ability to provide you with business financing capital, or someone who may place some money to legitimize their offer, but provide very little chance of funding once the money is paid.
On the flip side, there are lots of ways to look at fees prior to funding.
Most of the major banks will not charge any fees to perform the initial due diligence required to get to a commitment stage. But its not uncommon that a commitment fee is going to be charged and there could still be a number of conditions in the commitment that still need to be covered off before you see any money. So is this an up front fee or not?
Another lender strategy in the commercial financing space is lender commitment to the process. The lender will provide a term sheet for funding with conditions early on in the process and will continue on towards a funding commitment and actual funding if a deposit is paid when the term sheet is signed back.
The rationale on the part of the lender is that 1) the borrower is showing seriousness in their application as compared to shopping it all over the place with little chance of follow through; 2) if any third party support items are required, the lender will commission then directly and pay then out of the deposit; and 3) if the deal cannot be funded, the deposit will be returned less any outside costs incurred by the lender.
The alternative to the above is that the lender asks the borrower for different third party reports, which the borrower has to pay out of their own pocket and provide to the lender anyway. The only real difference is does the borrower pay the costs directly or indirectly through a deposit.
There are also alternative lenders placing investor funded money that want to have their time paid for when considering any deal. These groups tend to be smaller organizations in terms of head count and want to cover their operating costs when assessing any deal. The rationale here is that because they are assessing alternative financing deals that could be some form of debt/equity combinations, the amount of deals they may have to process and the time required to complete a deal may be substantial and difficult to cash flow from success fees alone.
And regardless of how much a borrower may dislike paying upfront fees, the process of going through an application and trying to get it funded does take time and resources. Many will argue that external costs should be covered by the borrower, but internal costs should be born by the lender, investor, or intermediary.
There are many different points of view and sides to the different financing fees charged.
So what’s the right answer with respect to paying or not paying up front business finance fees?
As mentioned above, in many cases there are many forms of up front fees that you would not necessarily consider as such that are charged every day by national branded lenders.
The key point I’d like to make is that financing fees are a business expense if you choose to pay them and you may not get access to funds without paying them prior to funding.
Like any business expense, its important to pay for value and to do enough homework to know that you are paying the costs for someone that could truly help you versus someone that is just projecting help in order to collect fees.
Further, also remember that just because you paid an up front fee doesn’t guarantee you funding. There are lots of online message boards where individuals cry foul and scam when no such thing took place.
The scammers are going to prey on the desperate, promising things no one else is able to provide, sounding like the “very thing” you were looking for.
And legitimate sources of business financing will take upfront fees, perform their full due diligence and not fund the deal also.
So it can be very difficult to assess good from scam and its very much a buyer beware world out there when it comes to paying upfront fees either right at the beginning of the process, or somewhere down the line before funding will take place.
Not being prepared to pay any type of upfront fee in any situation can limit your business financing options considerably as well so weigh the pros and cons carefully before making a decision one way or the other.