The Deal With "Up Front Fees"
Posted by Tom Markel III at 11:25 AM
3 comments - Categories: Trey Markel's Column
There has been a lot of talk in the past several months about financial institutions charging barrowers what we call “Up Front Fees” to get a business loan. When this strategy first came to the market it was a bit of a shock. Barrowers weren’t used to paying someone to find them a loan. Not upfront at least. Barrowers were saying “I’m trying to find money not spend money”. I was compelled to write a bit about this to make sure I clear up the perception of “Up Front Fees”.
As we all know times have been tough and it’s been a struggle to stay in business. Organizations of all kinds have had to get creative in their business processes to make sure they can survive another day. One industry that has had to get creative to stay in business is the lending community. This market has obviously hit them very hard. In order for many of these firms to stay in business they have had to change their business model a bit. Pre-market crash, any borrower could go to a financial firm to get a loan and that firm would do their best to find that customer a loan, free of cost. The financial firm would recoup their cost on the back end by charging a few points on the loan. Well what was happening is when the market hit the floor, barrowers were going to financial firms inquiring about a business loan. The firm said “Sure I will do what I can for you” and the firm would bust their hump for hours, weeks and even months to find that customer a loan for their business. After a few weeks the firm would call the customer saying “I have a solution for you” and the barrowers would say, “No it’s ok, I have found another solution” or, “No it’s ok, I’m no longer interested”. How aggravated would you be if you spent hours and weeks of hard work to help a customer to just have them blow you off in the end and not make a single dime off of it? Many of the employees that work these deals are compensated on commission only. The financial firms had to do something about this if they wanted to stay in business. This is where “Up Front Fees” come in. Firms will tell you they need a certain amount of money up front in order to work foryou.
So what I guess I am trying to say is that “Up Front Fees” are not uncommon in this current market. Some companies out there have unfortunately abused the program giving it a bad name. The caution warning I give you where fraud and scam could happen is to not give a single penny to anyone unless there is a contract in place. The contract should allow for your money back if that firm can’t find you your loan.
Bottom line…….Businesses need to be paid for their services today. However, always make sure the terms of service are in writing and both parties are on the same page. If bringing in a lawyer is more comfortable for you, then do it.
RN Ghosh wrote on 11/25/09 4:00 PM
1. Upfront Payments are invariably SCAMs if they are not backed up by adequate gurantees for refunds in case of failure to fund. These Guarantees should be Bank Guarantees and NOT Corporate Guarantees, as the cost of recovery (considering the fat attorney fees, and legal hassles) will invariably be far more than the monies that can be refunded.
2. iBank and other such Upfront Payment seekers should provide names of those they funded. I could point you to various names of companies who Fund and proudly display their client details and projects which they helped funds. Scamsters resort to avoiding this transparency quoting "NCND" clauses.
3. Having a contract into place is of no use considering point enumerated at Para 1 above. This is due to the fact that there would be a few clauses in the contract which would seem quite innocous to the borrower who is lured to pay the ufront payment against so called secured contract, but which would negate the lending process so that the lender knows that this would help them get away with the upfront payment.
4. Sometimes upfront payments are made by tricking the borrower to pay 3rd Party for Due Diligence Charges / escrow charges. This 3rd Party works in collusion with the Contract signing lending agency or coordinator to recieve their kickback at the back end.
5. If the Lending Agency wish to protect themselves from the risk of "No it's ok, I'm no longer interested" paradigm, they should use an independent Escrow Attorney (a law firm of repute) selected by mutual agreement. If two countries are involved, the services of attorneys with offices in both countries should be selected, with the payment being made in the country of the borrower.
6. Last but not the least, preliminary analysis of a case file should be adequate for the lending agent to assess if a case is "lendable" or not. This should be followed up with a checklist of documents to be provided to progress the lending, before they start " bust their hump for hours, weeks and even months". That way, both parties are clear, and it paves the way for a clean, safe upfront payment policy without risks to borrower elaborated above.