Step 23: Would You Pay A Fee To An Investor For Investing?
New entrepreneurs may encounter many occasions while they are looking for funds, where an upfront fee is demanded by the potential investor for investing in your business. Though you are desperate to get funds for your business, NEVER pay any upfront fees to attain funds.
It never matters even if they have "sample funding letters" and poof of past funding success, it is never worth it. Though there exists funding opportunities that require fees, it is extremely rare. You may love your venture more than your life but also as a businessman you need to step back and take smart decisions. If in any case you do want to proceed with a funding that demands a fee then make sure you ask these questions to yourself.
- What proof does the investor have regarding previous investments?
- What will happen if the investor later refuses to invest? Where will the money go, is it re-fundable?
- Do the fees, timeframe and other details sound feasible?
- Does the investor have any good references?
The investment market has become flooded with funding scams over the last decade. Though these scams are everywhere, you can still be successful in funding your project. Always remember that hurrying is not the solution, it is very rare that the first investor you meet will be the right pick, so stay patient. Being desperate or anxious can put you in great risk! Project funding scams come in all shapes and sizes, as the number of anxious entrepreneurs grow, Scams will always be on a rise.
An investor demanding a fee may call it anything from processing fee, placement fee or credit application fee, to maximize the probability of following through, the "investor" will make sure that you first sink significant time and effort into the deal. In many cases you will be asked to complete mountain of paper work which include credit application, references, co-signers, as well as go through numerous interviews before asking for the fees, while the Investor details are never fully disclosed. This to merely convince you the "investment firm" is legitimate.
Even though you will be told that the fees is completely refundable, if the financing fall through, you will have trouble recovering it. Even a court judgement will be of no help if the investor lacks the assets to pay you back. Rest assured that his "firm" will always turn out to be asset-less.
There are thousands of conmen out there who make a living by extracting these fraudulent fees from businesses who need capital desperately. They will go to any lengths; they may use agreements with unconditional clauses hidden deep in the fine prints which leave you with no escape recourse once the bad news comes in that your deal has fallen apart. The agreements will contain hundreds of reasons why you are being denied the financing and still be legally bound to pay the fees.
To protect yourself, do the following before accepting any investment offer
- Ask the investor at least 2-3 references. These may be companies he has invested before, call each of them and verify the information.
- If the investor looks legitimate, then insist that any and all fees be held by your lawyer until the funds are securely in your bank account.
Investors demand an upfront fee many times under the pretext of due diligence work that needs to be done. Chances are that you will never close a deal and they will stall and stall the process for months. And you may never see the upfront fees you gave them again.
Avoid getting scammed:
Let's first see how these scams operate
- Entrepreneur is enticed by the advertisement in the local newspaper, website, etc.
- The entrepreneur contacts the investor.
- You are asked to submit your business plan and other personal details.
- Few days later you are informed of the good news, that your business plan has been approved and investors are ready to invest.
- Invest will be done only after payment of a mandatory fees. The mandatory "fee" is allegedly called as "processing fees" or "premium fees".
- The fund seeker is then asked to transfer the money through electronic transfer or by money order.
- Once the money is received by the scammer, the entrepreneur never receives the funds.
Consumers can protect themselves from these sinister investors by being aware of the most common signs of a fraud
- Immediate Information: Entrepreneurs usually make a mistake of providing personal information before receiving any solid proof of funding. There are chances of identity thefts in this case, insist on getting documents regarding the investor and verify if it looks legitimate.
- Immediate Advance Fee: A trust worthy/reputable investor will never request immediate payment or electronic transfer of funds as the sole method of payment.
- Immediate Approval: A legitimate investor will have many rounds of meetings and will thoroughly look into your business plans and will have many queries. If the funding is agreed too soon, then it will most probably be a fraud.
- Will Not Provide Location Information: Refuse to do business with an investor unless you have their physical address. Also be weary of investors who request payment in a different state/country.
- "Guaranteed" Funds: Legitimate investors WILL NEVER fund people who have poor credit, no credit or bankruptcy history. If it is too good to be true, it probably is.
- Error In Written Communication: Reputable firms will never send you documentations containing typographical or grammatical errors. Always read documentations very carefully.
- Request For Immediate Payment Before Written Confirmation: Finally, verify the legitimacy of the firm by contacting your local business bureau or the federal trade commission about them. Request references from people who have successfully received funds from them in the past. Discuss with them the experience and difficulties they faced. Conduct business with a firm in your own country, especially if it is difficult to verify legitimacy of foreign investors.