Private capital fee costs, like any service fee, can be seen as a scam. Nothing could be further from the truth. These fees protect lenders from two possible o scenarios that can leave them at financial risk. Private capital fees fall into two basic categories. They are due diligence fees/processing fees and lender/lessor points or commitment fees. Let’s study both.
1. Due Diligence Fees or Processing Fees
The first private capital fee cost is called due diligence fees or processing fees. The lender/lessor charges these fees directly after a term sheet or proposal. They are offered and signed to underwrite the loan/lease covering the initial costs to evaluate the company’s capital requirements. The following 5 requirements are assessed:
- Financials and business plan
- Legal costs
- New appraisals
- Credit and background checks
- A site inspection
If the lender finds an issue, they can block project funding and take a lot of other due diligence.
Typically, one in ten loans/lease lines a lender submits will close. Deals collapse and borrowers can walk away just before closing. These scenarios leave the lender in a high-risk situation. Paying $10,000 to $50,000 or more in due diligence or processing fees in order to secure millions in“capital growth” dollars, shows the lender you are serious about the loan. It is also a partial safeguard against these upfront processing costs a lender would incur in either scenario.
2. Lender/Lessor Points or Commitment Fees
The second private capital fee is called Lender/Lessor Points or Commitment fee. Many private lenders/lessors charge from 1 to 5 additional points above any interest cost. These are typically worked into the final terms of the term sheet and or commitment letter. These fees become part of the revenue or investor return model and are factored into the risk/reward they are taking.
Private Capital Fees: One Final Thought
There are many borrowers who persistently want lenders to give them a lease or loan with no up-front costs. The fact is that these private lenders or investment firms, who can write the check, simply do not exist. The borrower must cover these certain inherent costs, taking some risks. One risk includes the possibility the lender may reject or modify the loan/lease request at the time of commitment. Therefore, you must have a professionally developed, viable, detailed business plan and an excellent management team prior to engaging the lender. There are no shortcuts and no room for dreamers.
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