In business financing, upfront fees are monies paid in advance to any potential lender, investor or intermediary for performing due diligence related matters, such as business valuations, accounting or other professional services to help determine the viability or risks associated with your business project or company. It can also be applied towards the closing costs associated with your funding your business project or company.
To continue, upfront fees, is one of the most controversial areas of business financing. However, if you have ever purchased any type of real estate that required mortgage financing, you would know that the mortgage company requires you to pay for the appraisal reports, home inspections, environmental surveys, and all the associated due diligence fees “upfront” prior to closing. In business financing the concept is the same.
The reason lenders or investors require you to take on all the financial risks associated with investigating your business project or company, is because they don’t want to lose their money or time HULT PRIVATE CAPITAL investigating your business project or company.
Yes, it is true that there are lots of predators out there waiting for the opportunity to prey on entrepreneurs and take advantage of their need for business capital by offering bogus services with no intent to provide the services that are being offered. However, in any legitimate business financing transaction, there are reasonable fees that you should expect to pay.
It’s important to note, that when dealing with institutional or private investors it does cost them money to properly investigate and research your project in order for them to make a decision as to whether or not they are going to fund your company or business project. These costs include attorney fees, professional fees, third party valuations, and more.
Stop and think about this for a moment. If you’re an investor putting up your money into any project, wouldn’t you want to have all of the information that’s available in order to make the best possible decision that you can?
Moreover, institutional investors and private investors see a plethora of projects every day, can you imagine what it would cost them to properly investigate and research every project that they may have an interest in? That is why the financial responsibility is passed on to you.
Furthermore, there is also that psychological factor. This serves as a safeguard for most lenders and investors. Meaning that, if there is something wrong with your project that you know will cause most investors to back off, you probably won’t put your money into doing all of the due diligence work.
Always remember, that the wise investor will always limit his cost in investigating your company or business project because in the end your project may not be as fantastic as it may appear to be and investors don’t want to lose money on propositions or proposals.
In my experience I have seen many entrepreneurs contact investment bankers or venture capitalists with the expectation that they will work for free. Imagine walking into an attorney’s office and asking them to do work for free? Just as your lawyer, your accountant and for that matter, your doctor charges you a fee for the services offered, an investment banker, venture capitalist, etc. is also paid a fee for the services that they perform.