Advance fees are “standard business practice” for some (but not all) business loan situations. It is understandable that a commercial borrower would prefer not to pay such a fee, so it is important for a commercial borrower to understand when it is most likely to be necessary. In fact, a business loan advance will not be necessary in many business loan scenarios. This is especially true for commercial financing, such as business cash advances, which take less time and generate financing in just a few days.
For the more time consuming business loan processes, it is increasingly common for a down payment fee to be paid during the preliminary stages. This is especially true when working with commercial loan consultants who specialize in commercial loans. Most advisors who work with residential mortgage loans (and make commercial loans as a sideline to their main business) will not charge a down payment fee because in many/most cases certain state and federal regulations prevent them from doing so legally (In other words, they are likely to charge a down payment fee as well if they are not legally prohibited from doing so due to prevailing residential loan compliance issues.)
So why wouldn’t a commercial borrower who doesn’t want to pay a down payment fee simply work with someone who doesn’t charge a down payment fee? Many commercial loan situations are too difficult for the average residential loan counselor to handle successfully. Just like someone looking for a more expensive medical or legal specialist to help them when faced with a serious medical or legal problem, most business borrowers have found that business loan problems are often just as serious. and complex and in need of a commercial loan specialist. .
It is in these situations, when a business borrower is working with a business loan specialist, that a retainer fee should be viewed as “standard business practice” for more difficult and time-consuming business loans. I have said elsewhere that one of the most important lessons to be learned from a thorough analysis of the trade finance “trades” is that the lowest rate is hardly ever associated with the best offer for the commercial borrower. A similar observation based on more than 25 years of commercial lending experience: the lowest rates are also rarely associated with the best deal for the commercial borrower.
The fees charged by commercial loan specialists (including retainer fees where applicable) are almost always higher than those of loan counselors who do not specialize in commercial loans. In the end, most of these borrowers still choose to deal with a highly qualified commercial loan specialist because they finally realize that they might it is better to use the “best” business loan advisor instead of the “cheapest” business loan advisor.
The most typical range for business loan retainer fees is $2,500 to $10,000 (obviously a wide range). There are several reasons for a retainer fee and here are three of them.: (1) to compensate the advisor for part of the initial processing of the loan; (2) to serve as a “good faith” deposit for general commercial financing fees; and (3) focus the borrower on working with a commercial loan counselor. The third reason might be the most important of all. With difficult business loans, it is extremely counterproductive for a business borrower to work with multiple business loan advisors (regarding the same loan). Once a down payment fee has been paid, a business borrower is likely to feel more comfortable working solely with the business loan counselor who received the down payment fee, and with difficult business loans, this unified approach is likely to have more success. It is this success that ultimately justifies the retention fee.
Copyright 2005-2006 AEX Commercial Financing Group, LLC. All rights reserved.
