Upfront bank costs for due diligence

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November 13, 2021

by a searcher in Chicago, IL, USA

Hi all, I have heard that banks will ask for an upfront payment to cover their due diligence costs. Is this true for all banks or only some? Is this negotiable?

It makes me wonder what the point of hiring a great law and accounting firm is, if we need to pay for QoE and dliligence, then the banks want want more money to cover their diligence. Thank you

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Reply by a searcher
from University of Florida in Boynton Beach, FL, USA
Went to market for a ~$2mm SBA loan recently and most banks requested a $5-$10k refundable deposit to proceed from term sheet to full underwriting. This is used for costs outside of legal and QofE (which you'll pay on your own) and included a bank fee, M&E appraisal, and SBA business valuation, each of those items roughly $2k. The bank will pay those vendors using your deposit money as you progress thru diligence. Then towards closing you'll have to pay the bank's lawyers in addition to your own. The dollars generally go up as a % of the deal.

Coming from a banking background, individual banks can be surprisingly different, so call around and ask some questions before you have a deal on the table. Good bankers will be transparent on their process and often will give you ranges on deal costs and pricing too.

Hope that helps!
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Reply by a searcher
from IE Business School in Seattle, WA, USA
I paid a $5k deposit when I signed the term sheet on an SBA loan. This was pretty typical across multiple banks that I had requested term sheets from. The $5k was nonrefundable to cover some of their costs if the deal didn't close, & it was applied to my fees at closing since I did close. I'm not sure if it's typical for non SBA deals, but it definitely seemed standard for SBA ones. Good luck!
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