Should you pay upfront costs for a small business loan?
By: DaJuan Tircuit | Posted: 18th April 2007
Desperate for money, many entrepreneurs are forking over thousands of dollars in upfront costs for business loans that many times are not funded. Disappointed, embarrassed and frustrated, not only do many give up but they discount the hardmoney lenders and private investors in the lending industry as scammers and thieves. The question looms. Is it an ethical practice for lenders to request an upfront payment.
Many time entrepreneurs turn to angel investors, private equity lenders and what is commonly known as "hard money lenders" to fund new ventures. Unlike traditional lenders or banks, many of these lenders ask for a deposit or upfront cost that can range from $2,000 on up. This has become the cause of much controversy and debate in the small business community. The questions looms. Is this an ethical pratice?
Unfortunately, there are lenders that are unethical and dishonest. However, in all fairness, you have to separate what is unethical from what is a common industry practice. The key is to know what the upfront costs will cover.
Here are a few questions that you should ask before paying upfront fees.
1) Are the fees for additional services that must be rendered before the application can be processes.
EXAMPLES -
If the loan will be secured by real estate, a commercial appraisal wil be required. The fees start at $2,500 and up.
Does the lender require a business plan? The cost to have a professional (not template based shabby work that is available anywhere on the internet) plan prepared will range between $3,000 - $10,000.
For a new business, do you have to provide proof of licensing, permits or industry approvals? This is called "soft costs" and lenders will not approve funding until they are sure that the project / business will be permitted by regulatory authorities.
Are there any blueprints, drawings, or plans that have to be prepared, lenders require proof that the project is feasible and that all costs have been considered. This means that architectural or engineering costs have to be expended before funding.
2) If you are asked to pay for these costs, take the lead. Do you have the option of either choosing the service providers or giving final approval on one that has been recommended by the lender. Ask if the contract with each of these service providers is with your company or with the lender. This will ensure that you have ownership of the product.
3) Before spending money, find out who gets the original and /or copies of the finished product
4) If the upfront costs are strictly for the lenders fees, keep in mind that processing large loan applications require a substantial investment of time and there is no guaranty that you will be funded. There are subjective factors that can cause your application to be denied that neither they nor you have any control over. Before you sign any agreement, discuss the anticipated workload involved with processing your application. Only you can decide if the fee is reasonable.
5) The last thing that you should know is that not all lenders are "really lenders" some are brokers that match lenders with applications and charge a fee for the matching service, processing the application and completing all of the tasks needed to package the loan for the lender. Ask ---- and then decide if you are comfortable with his/her fees.
The bottom line is that not all lenders require an upfront fee, if the fees are for legitimate costs that is the cost of doing business. If the fees are for broker's services renders, you have to decide if the value offered by the broker is worth your investment.
About the Author
Occupation: Business Consultant
DaJuan Lockett-Tircuit has provided a comprehensive array of business and management consulting services for 12 years. Her back ground and services include writing business plans, marketing plans, policies and procedures manuals and creating & teaching business planning and marketing curriculums. Ms. Tircuit also provides consulting services and digital products that teach business owners how to build a strong business credit profile in under 60 days. As a happy mom of 4 children, two grandchildren, a "grand-puppy" and a host of many nieces and nephews, she cherishes her family life, her commitment to helping entrepreneurs grow their businesses and her involvement in the community.
She owns two consulting firms.
Rhema Business Consultants
A firm that provides certification, research and marketing services for small businesses that want to grow their businesses by participating in SBA 8(a) set-aside contracts program.
::http://www.rhemabusinessconsultants.com
::blog: http://www.8acertification.worpress.com
AND
Rhema Funding Solutions
A company that teaches small business owners effective strategies for building business credit needed for business start up, working capital and expansion initiatives.
Business Funding Sources
:: http://www.rhemafundingsolutions.com
Download for Build Business Credit in 60 days
::http://rhemafundingsolutions.com/Business_Credit_Xpress_-_Do.html
Free Training
::blog: http://www.buildbizcredit.blogspot.com
Marketing Tips & Training
On her blog, "Big Business Marketing Strategies for Small Businesses" she provides Quick Start Action Plans, Free Software & referral resources that simplify the entrepreneur's marketing plan.
Free Quick Start Action Plans at
:: http://marketinghotspot.blogspot.com
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Tags: angel investors, new ventures, time entrepreneurs, private investors, business loans, upfront costs, upfront payment, traditional lenders, hard money lenders, regulatory authorities