Fees and the Phantom Lender
This is one of the thorniest subjects involved with funding, either equity investment or loans. It is also very much misunderstood.
Are They All Scams?
In the view of the many "scam list" websites, any fee automatically qualifies the deal as a scam, a very self defeating view and quite erroneous. This is not to say that there are not many fee scams around, just as there are stock scams, real estate scams, used car scams, roofing scams...well, you get the idea.
Let's begin here with some definitions.
Up Front Fees:
Usually charged by a broker or firm for the purpose of introducing you to a lender, investor or other financial entity who might be willing to put money into your project. Most consider this a "scam". On the other hand, the broker has expenses to maintain his office, phone, cell phone, website, etc.
Unfortunately, too many brokers truly have no legitimate funding sources as they have also been conned.
Capital Funds Group, Ltd. does not charge up front fees.
Due Diligence Fees:
These are the fees charged by either the investor or the lender, whichever you are involved with. Investors often do not charge such fees as they are normally only looking at one or two possible investment projects at a time. [In the 90s, during the budding dot com frenzy, equity investors averaged one investment per 2000 projects submitted. After that bubble burst, the number went from one investment per 10,000 projects submitted.]
Lenders, however, might be looking at anywhere from 20 to 100 loans to projects at any one time. They virtually always charge due diligence fees. They have to check credit ratings of all principles, backgrounds, tax records, criminal records, business records, possible bankruptcies and often will run parallel proformas to yours to see if their numbers match up to yours. All that takes money and a lender could easily go broke paying for the stream of possible loans they might do.
The Facts of Life
I was going to go into this area even more deeply until one of CFG's associates found a posting at a financial blog site. The posting was so accurate, I now send it out to any of our clients who question the need for due diligence fees. The author simply signed himself as "John W." and we found no way to make contact with the author. If he shows up, we will delightedly add his last name.
So here is John W.'s contribution to this subject:
"Dear Borrower(s) and/or Broker(s):
I am very intrigued by how many borrowers and brokers there are who think that there are lenders out there who do not charge up front fees. When I tell them about the up front fees on our loan programs, they say things like:
'Reputable lenders don't charge up front fees'. 'No up front fees, is how it is done in the financial world'. 'Upon approval of the loan or letter of commitment, then my client will pay all the fees'. I have been in this business for quite a long time and I have heard this, countless times before.
It appears that there is a 'myth' out there. I'm talking about the 'Mythical Lender'. You know who they are. They are the lender that does not charge the borrower one dime in up front fees to close their loan. I have asked borrowers and brokers countless times, who is this lender who does not charge up front fees? ... and no one has ever given me an answer. The truth is, that they do not exist. But, maybe you would like to be the one to prove me wrong!
What is actually happening here is quite simple: There are a lot of borrowers with no money for fees who perpetuate this myth, because they want lenders to give them a free ride. Lenders have costs to underwrite a loan, do a site inspection, their own appraisals (not yours) and a lot of other due diligence. There is also considerable cost in blocking or setting aside the money to fund your project. Only about one in ten loans submitted to a lender ever closes.
Should the lender bear all of these costs for the nine borrowers who thought they had a good project, but failed to prove for reasons too numerous to mention that they could repay the loan? Do these borrowers with a dream deserve a free ride?
All reputable lenders charge up front fees that are refunded or credited back at the closing of the loan. [Note: Not all do this.] What would be the purpose of paying fees at closing, only to have them refunded minutes later?
I have often wondered that if what these borrowers and brokers say is true, why are they contacting me? Why are these borrowers and brokers not contacting that 'Mythical Lender' who doesn't charge up front fees? I'll make it real easy for you. Again, I say they do not exist!
Borrowers and brokers have been dreaming, because as I said earlier, they have no money. They may indeed have a great project, but they have no money. Oh sure there are a few borrowers out there who might have money, but they have heard this 'myth' so many times that they think it is true. If it is true, why aren't they closing their loans with this 'Mythical Lender?
Please prove me wrong, I beg you! Please tell me who this 'Mythical Lender' is and I will send all of my business, through you to them! In fact I predict that if you share with me their secret name, location and phone number, that I will help you become the wealthiest broker on the planet in a very short period of time!"
— John W.
So there you have it. You're not going to get something for nothing. You are going to take some risks to get into business. If you're asking a stranger to risk hundreds of thousands - or even millions - of dollars in your venture, why should he also take the risk of paying for your due diligence? You are living in a dream world if you think he will...or should. And, to make matters worse for you, the lender or investor, after taking your money and doing the due diligence effort, cannot guarantee you that you'll be funded. He might find out that the niche market you totally believe in doesn't exist? Or is much smaller than you are betting on? Or that he discovers you've started and failed in several businesses? Or had a conviction for financial fraud? Or any one of a dozen other sound financial reasons for choosing not to put up his money for your dream?
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