My experience was that due diligence fees were always charged, but with a debt investor, the client paid pre-funding. With a private equity investor, the fees were added to the funds requested and paid after funding. In both cases, the due diligence fee budget was presented to the client in advance of a term sheet.
Is this a standard practice or are there many variations for payment of these fees?
The due diligence process is a necessary and wise business practice. RobertJ stated that generally professional lenders do not ask for a fee at the beginning. With this I agree, however most all professional investors will require a due diligence fee PRIOR to funding the venture. "Upfront fees" are generally used to refer to a fee rendered before any service is given. There are firms that will charge you an "upfront fee" that is paid to them, whether or not you are approved for a loan. This is an unscrupulous practice.
Most professional firms will submit your application, review it, and if there is interest, the lender will contact you for an interview. It is then that should receive a Letter of Interest (LOI). You should also request a POF (proof of funds) prior to paying the due diligence fee. After both parties have agreed to move forward, the borrower will be responsible for due diligence fees. This ensures that the lender is not wasting money on projects that have been misrepresented by borrowers.
Contact us for more information on commercial funding programs.
---Commercial Venture Funder Erik Williams www.iwodservices.com
Sounds suspicious, tell them to take the 'fee' out of the money they invest before they deposit it into your bank :P