I recently talked to a business owner who was in the process of raising capital. To this end, she paid a $20,000 upfront fee to a finder (a person who brokers equity investments and loans).
The result? Nothing. The finder said that a variety of banks were not interested in the deal.
Oh, and that $20,000 fee? Unfortunately, that was non-refundable.
With the credit crunch -- and slowing economy -- entrepreneurs are certainly having trouble raising money. But, there also appears to be a rise in so-called "advance fee schemes" (this is according to a recent piece in the Wall Street Journal, which is a paid publication).
In fact, the FBI is investigating the matter (and also has some helpful resources on its website). Although it could actually be pretty tough to prove fraud. Essentially, there must be evidence that the finder had no intention of raising the capital.
So, how can you protect yourself? Here are some tips:
- Verify: Do a background check on the finder, such as by using an online service. Also, does the finder have a website? A real physical address – not a PO Box? Customer references?
- Payment: A small upfront free is OK. However, you should really be paying for performance; that is, a solid introduction to a financing source.
- Contract: Sign one and have an attorney review it.
- Be wary of language like "guaranteed": In the world of finance – especially with small businesses – there are no guarantees. Simply put, raising capital is extremely tough. So, don't get sucked into grandiose promises.
Then again, you must ask yourself: why do you need a finder anyway? After all, if your business is credit-worthy, why can't you go directly to the bank? Hey, many business owners do this successfully, right?
Perhaps a better approach is to hire an expert to help fill out the loan documents and prepare a business plan. For such services, the fees can range from $1,000 to $10,000 or so (again, make sure you do a background check and don't pay the full amount upfront).
Or, on the other hand, you can craft your own business plan. And the good news is that there are many books on the topic – such as Mike McKeever's How to Write a Business Plan
Comfort Zone Investing: Survival of the fittest -- letting some banks fail
Three All-American stocks for portfolio fireworks
Michael Jackson fireworks, the workaholic
Reader Comments (Page 1 of 1)
7-07-2008 @ 8:07AM
mann8612 said...
Who would be dumb enough to "Pay In Advance" to get a loan? Anybody this stupid should not be in business. If anything have the fee taken out of the loan once it is processed. Actually this type of practice should be a crime.... If you can't get a loan at your local bank, maybe that should be your first sign that you are not worthy of a loan.. Wake up America!!!
7-07-2008 @ 9:17AM
Larry Blevins said...
For the most part, I agree with the writer. However, writing a business plan does not guarantee a loan from a bank. But it sure can help in some cases. Bankers consistently refer business to me because they have turned down the loan and they know that as a general rule, other banks will turn it down as well. I don't charge an up-front fee but agree with the writer that a small fee (say $250 to $500) may be o.k. because the loan broker has to make a lot of calls and spend a good deal of time to find a lender who will do this loan. And most of the time it is a private lender. But I also agree that paying a larger fee up-front sounds suspicious and I would look to find another broker if that were the case. And just because the bank turns down your loan, that does not make you a bad risk. Some banks just won't do certain types of loans. For example, one bank I know will not do any type restaurant-type loans. This would include pizza parllors, ice cream stores, etc. These are not necessarily bad loans but they are loans that the bank has said they do not want any part of. Finally, loan brokers as a general rule are a good source of loans. But do be careful and don't pay a lot of money up front.
7-07-2008 @ 11:26AM
Toriluve said...
The only money you should be paying upfront is the "application" fee. Which in the case of a business or commercial loan may be higher than a conventional loan because the app fee may include additional credit reports on all partners in an LLC, franchise history of a corporation, as well as other business and financial searches on the applicant.
If you are paying more than several hundred dollars to work with a broker for VC, then make sure you understand the TERMS of your contract with the broker BEFORE you give them any monies over the initial application fee.
A mortgage broker who actually does spend time and money on trying to find you a loan has legitimate expenses - no one works for free.
But typically the larger portion of their overall fee comes from points, commissions, etc. once they "sell" your pkg to an investor and the transation closes, not before.
7-08-2008 @ 1:03AM
Nick said...
When you meet up with someone like that, just remember, a kind word and a gun always gets the best results.