Why pay fees for the Due Diligence?

There is due diligence conducted on all projects.

When you want to buy a home and approach a lender for a loan, paying fees for property appraisals, credit checks, loan origination, home inspections and others fees are all considered common and are not objected. These fees in connection with getting a loan approved are part of the due diligence a bank requires and yet the bank doesn’t pay for this due diligence. It is the responsibility of the applicant to bear such cost and is always understood and accepted.

Entrepreneurs looking for business funding need to have the same understanding. As with lenders for home loans, lenders for business loans require the opportunity to verify your information before funding any transaction and it costs money to verify the information.

Consider all costs that may be appropriate for any transaction in your type of business.

What is the cost for:

Property appraisals

Business valuations

Equipment appraisals

Accountants and Attorneys who have expertise in the type of business that is requesting funding?

Specialists like engineers or architects?

What does it cost to have the investor’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 any transaction and they need to be paid before funding can be approved. When seeking funding sources, you are required to pay for the expenses of verifying and confirming that the information you provided is accurate and makes financial sense.

Business capital is usually funded by either specialized entities or sophisticated investors who obtained wealth by being financially knowledgeable. These sources will not write checks without having all the necessary tools to make the correct decisions and to have the information that will keep them from funding bad deals. Therefore, they have to take steps to confirm the accuracy of the information provided.

Business funding is riskier and has more complicated aspects than home loans. Statistics show that 80% of businesses go out of business in the first 2 years. When taking all this into account, it becomes easier to accept the reality of due diligence fees.

The more technical or unique the business is, the more due diligence will be required to prove the financial sense of a funding decision. Detailed business plans help the process by providing a prospective funding source with a clear and concise detail of your business. Businesses without business plans or with imprecise or incomplete business plans will not be funded.

It is expected that the information provided is accurate, that you have extensive experience in your field and most of all that the information is verifiable. Although many companies already have appraisals, audited financial statements and third party opinions about their projects, a prospective funding source cannot simply rely on this information and will still need to perform its own due diligence process.

Often times a person may be an expert in his type of business but lacks the time or skills to develop a good business plan. If the business concept is sound and he wants to pursue a business loan or venture capital, he will need to pay Consulting Fees to professional consultants who will 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 Funding source is willing to take the next step and requires verification of the details.

When a lender has reviewed the information and has determined that 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 to the comfort level they need.

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

It is very important to understand that any the project requires due diligence to be performed before funding can take place. When you deny a Funding Source the opportunity to investigate the financial sense of the transaction or you simply do not have any cash to pay for due diligence, the deal will just stop at that moment. Therefore, it is logical to expect to pay appropriate fees when seeking to acquire business capital.