Truths and Myths about Advance Fees

advance feesAdvance fees are monies that you pay to a person or company before receiving something.

The argument that paying advance fees is a scam is based on broken promises. Stories you read on social media about people who paid advance fees and never received the service they paid for are fictitious. They are written by angry people who were promised something and the promise was not fulfilled. It’s the promise that is the scam, not the fee.

In common with many other professionals (accountants, legal firms, consultants, advisors, investment banks etc) it is not uncommon for finance facilitators to charge a non-refundable advance fee for the initial processing, due diligence and development of a new project.

It is vital to understand that when you engage with them, to act in obtaining project funding, you are appointing professional advisors who are paid professional fees unlike brokers who earn commission.

In appointing them, it is no different to appointing lawyers or accountants. Professional fees payable on engagement and subsequent consultancy work on a project are essential for them to start work.

This initial professional fee can vary depending on the nature of the project. Facilitators otherwise take the risk that despite having performed work under a client agreement, if a client decides not to pursue a funding solution for any reason or there are material events later discovered or introduced, they are at risk of being out of pocket for any work performed. An initial fee demonstrates a commitment from a borrower that should they withdraw from the funding process for any reason or the occurrence of a material event, the facilitator will have had their basic initial costs defrayed.

Additionally, they risk significant reputational damage with funders, especially if they approach them with projects where they have not done extensive detailed preparatory work or if the project breaks down due to a lack of robustness of the project. This has unfortunately happened to many in the past. It is usually a board level decision that facilitators do not take on client risk, and such procedures have been developed through experience.

It has been the experience of several firms that the payment of an initial fee and any ongoing consultancy fees, results in a client being more invested in their project and this usually results in better outcomes. It also sorts out the less than serious inquiries and enables them to prioritize projects.

Facilitators will always allocate resources to projects where we are being paid a professional fee in preference to those where they are asked to work speculatively.

The initial fee is often times deducted from the success fee for success fees greater than an agreed threshold and may not be necessary for subsequent projects with a client once a relationship has been established. The initial fee covers the primary review of a company’s financial plans and forecasts, to ensure that they are suitable for financing and have adequate documents available.

Costs are based on the scope and assumptions included in a standard Statement of Engagement, and together with an NCNDA, forms the basis of the contract between them and their clients.

Each individual funding project is unique and initial acceptance of any project is based upon the accuracy of the initial information supplied to them.

 


 

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