Why does due diligence need to be performed and why does the Client pay fees for the due diligence? Due Diligence Fees can be a major hurdle in funding some transactions. In this issue of Business Funding Secrets , we will cover some of the key points concerning Due Diligence Fees.

When a person wants to buy a home and approaches a residential lender for loan approval, paying for a property appraisal is considered common and is not objected to by the Client. There may also be fees for credit checks, loan origination, home inspections, termite inspections, etc.

These aspects of getting a home loan approved are part of the due diligence the bank requires, but the bank doesn’t pay for this due diligence. It is the responsibility of the Client. This is understood and accepted.

People looking for business funding need to have the same understanding. As with lenders for home loans, lenders for business loans require that they have an opportunity to verify the Client’s information before funding the transaction, and it does cost money to verify the information.

Consider the costs that may be appropriate for a transaction in your area. What does it costs for property appraisals, business valuations, equipment appraisals, hourly rates for CPA’s and Attorneys who have expertise in the type of business that is requesting funding? How about the costs of specialists like engineers, or architects? What does it cost to have the lender’s representatives or specialists fly to the location, along with expenses for hotel, and meals? All of this doesn’t happen for free. The accountants, attorneys, airlines, and specialist don’t wait to see if the deal gets funded before they get paid. These are real expenses in proving the soundness of the transaction and they are paid before funding can be approved. Clients are required to pay for the expenses of verifying and confirming the information provided by a Client.

Business loans are usually funded by either banks that are regulated by the federal government, commercial funding companies who are held responsible by their shareholders, or sophisticated investors who obtained wealth by being financially knowledgeable. These sources of funding are not uneducated people with extra cash and no common sense. They are not going to write checks haphazardly. They do their best to keep from funding bad deals. Therefore, they have to take steps to confirm the accuracy of the Client’s information.

Everyone has seen the statistics that 80% of businesses go out of business in 2 years. When it is understood that: 1. Business loans are riskier than home loans, 2. Business loans have more aspects to them than home loans, and 3. It is common and acceptable to pay for due diligence on home loans - then it becomes easier to accept the reality of due diligence fees in relation to acquiring a business loan or receiving venture capital.

The more technical, or unique, the business is, the more due diligence will be required to prove the soundness of a funding decision. Detailed business plans assist the process by providing a prospective lender clear and concise detail that can be easily verified. Businesses with vague business plans won’t get funded.

It is appreciated that most Clients are truthful, have extensive experience, and have verifiable information. Many Clients already have appraisals, audited financial statements, and third party opinions about their projects. However, you would never go to court and use the other guy’s attorney. Therefore a Client will still need to follow a process of due diligence.

There are occasions when a person may be an expert at the type of business they are running, but lacks the time or skills to develop a quality business plan. If the business concept is sound, and the Client wants to pursue a business loan, or venture capital, they will need to pay Consulting Fees to professional consultants who can assemble the required information. Consulting Fees are separate from Due Diligence Fees. Assembling the information for a quality presentation to a prospective lender is a different process than when a detailed business plan is provided and a specific Funder is willing to take the next step and requires verification of the details.

With access to the Internet, businesses looking for funding can literally find millions of web sites claiming the ability to fund deals. It is advisable to take caution. The Client needs to have provided summary information, a specific funding request, a business plan, and supporting documentation. When a lender has reviewed the information and has determined that the deal is something they can fund contingent on the proper due diligence being completed with positive results, then they will determine what type of due diligence it will take to get them the comfort level they need. At the same time Clients should have the opportunity to verify the creditworthiness of the Funder before paying any fees.

Real Funding Sources do not charge fees just to put the money in their pocket. The Funders have the capital to invest in others, they make money by lending, they don’t need to con a Client out of a few due diligence dollars, and put up with the headaches that would come with that situation.

If a funding request is being made, but the business requesting the funding hasn’t set aside money to acquire a loan, refuses to pay due diligence, or doesn’t have any cash available for capital acquisition, it is very unlikely they will ever receive any funding. There are costs in acquiring real estate. There are costs in acquiring equipment, and there are costs in acquiring capital.

It is very important to understand that if the project requires that due diligence be performed before funding can take place, then that is exactly what needs to happen. When Clients deny a Funding Source the opportunity to investigate the soundness of the transaction, or the Client simply doesn’t have any cash to pay for due diligence, then the deal stops there.

It is not very likely that a Client looking for business financing, will have a deal as easy to do, or has less risk than a home mortgage. Therefore, it is logical to expect to pay appropriate fees when acquiring business capital.