Lenders Due Diligence              

Private Equity Professionals:
Due diligence can apply to the process of verifying the information in a loan submission request or can be as much as performing a complete investgation or an analytical review that precedes a commitment to lend or enter into an investment arrangement. The purpose is to determine if the request is attractive enough and to measure the underlying risks and issues which may pertain to a potential investment. Due diligence empowers investment professionals with the tools to realize an effective decision process and optimize the terms of a deal. The procedure is of critical importance and is standard practice. It is the responsibility of the client to provide all the requested information and cover all expenses necessary to conclude a positive due diligence investigation and review.

Lender’s Due Diligence:
This is a subject that is little understood by borrowers. However, although this explanation may not do justice to the subject, it will arm you the borrower with some understanding of the subject to help you prepare and to soften the shock of the Letter of Intent (LOI). It is customary for the lender to send the LOI to the Consulant/Intermediary to be forwarded to the borrower. However, the borrower must understand that the Consultant/Intermediary has nothing to do with the LOI and has no authority whatsoever to make any changes to the Investor(s) LOI. The LOI is strictly between the Lender/Investor and the borrower, so do not blame the bearer of good and not so good news. When a lender offers a Letter of Intent it means that the lender has provided the borrower with a temporary approved commitment to fund, but certain terms and conditions have to be met which are spelt out in the letter, such as due diligence or third party fees, rate, commitment fees, Consultantancy fees and more. All the terms and conditions in the letter must be met satisfactorily before any funds are released. Lenders have to do their due diligence and must pay for third party fees such as airfare, ground transportation, hotel accommodation etc. for their visit to the site of the project, meet with the principals to discuss and clarify any outstanding issues.  A lender can be in your country or town for a day, or maybe a week or more. No one knows for sure of the length of time. Only the lender can determine the length of time that will be spent on a site visit based on unique circumstances which pertain to the project. A lender may travel alone or with a team of experts. Some lenders provide recourse loans, which means if you default on your loan obligation the lender can take your personal property. They also  provide non-recourse loans, meaning the borrower’s personal property is not compromised. In the case of non-recourse loans, a lender in order to protect himself may purchase a surety bond to cover his investment in the event that the borrower defaults. That is a cost that is passed on to the borrower. There are also attorney fees for preparing the legal documentation and in most cases almost all those items on the page "How To Get Funded" under the subheading "Availibility of Third Party Documentation" that may be outstanding. A MAI appraisal alone may be in the range of approximately $4000 to $10000 or higher. Only the engagement of an MAI appraiser can give the true cost of an appraisal. A loan commitment if it consists of land and buildings requires an up to date appraisal. An appraisal a year or two years old may help to prepare documentation but an up to date document is mostly required. Again, a lender may have to travel with some experts like an appraiser, an environmental engineer or others who will review market surveys, site surveys, business plan validation, entitlements, zoning etc. and make sure that all other government requirements and other basic documents previously submitted are satisfied.  It is not unusual to pay $10,000 to $30,000 or even $100,000 or more for due diligence. Only the lender/investor determines how much the fee will be, which is based on several factors which are always documented in the letter of intent/interest (LOI) and discussed one on one between lender/investor and the client during the initial conference call.   Only after the due diligence investigation has been successfully concluded that a final commitment letter is issued to move the process to the final funding stage. 

 Now that you have a basic understanding of due diligence, be prepared to budget for this expense in advance. Due diligence is not included in the loan and cannot be paid at closing. Independent third party officials that perform certain services have to be paid. The borrower is responsible for those expenses which must be paid directly to the lender along with the execution of the document (LOI) which is usually time sensitive. This has nothing to do with our fee which is paid at closing.

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