Why Serious Finance Mandates Require Upfront Fees

Financing Work Begins Before Lender Outreach

One of the most persistent misconceptions in corporate finance is that the adviser is paid to provide a lender's email address.

That is rarely the valuable part of the mandate.

Before institutional distribution begins, someone has to determine whether the transaction belongs in the market at all.

The requested capital structure may be wrong. Senior leverage may be too high. The borrower may need subordinated capital. The project may have an unfunded equity requirement. Collateral may be incorrectly valued. The proposed repayment profile may not survive a downside case. Documents may contradict the financing narrative.

Those issues have to be resolved before serious lender relationships are used.

A poorly prepared transaction sent to twenty institutions does not become a well-prepared transaction. It becomes a poorly prepared transaction seen by twenty institutions.

A Retainer Pays for Execution Capacity

An advisory retainer purchases a defined commitment of professional resources to the mandate.

The work varies by transaction. It may involve financial analysis, capital-structure design, lender mapping, preparation of underwriting materials, document review, management of lender questions, term-sheet analysis and coordination with counsel or other specialists.

Financely explains this further in its guidance on structured finance retainer fees.

The important point is that the work starts well before closing.

An adviser waiting until closing to recover every dollar of cost is effectively financing the client's mandate with its own balance sheet.

That may occasionally be a risk an adviser chooses to take on an exceptional transaction. It should never be assumed by the client.

Transaction Review Is Also Paid Work

Some firms separate preliminary review from the full mandate.

That is commercially sensible where a transaction requires substantive analysis before the adviser can determine whether it should be accepted.

The adviser may need to examine the borrower, sponsor, transaction structure, use of proceeds, repayment source, collateral, contracts and existing financing before giving a useful answer.

This is work.

If the review produces a viable mandate, the initial fee may be credited toward the larger engagement. If the file is structurally defective, both parties discover that before materially greater costs are incurred.

The Headline Transaction Value Is Irrelevant

A common sales tactic among weak prospects is to emphasize the size of the transaction.

“This is a USD 150 million project.”

“The instrument is worth USD 300 million.”

“We have a USD 500 million pipeline behind this mandate.”

None of those statements pays for the work on the current file.

The amount being requested tells the adviser how much capital the client needs. It says nothing about the quality of the transaction, the client's authority, the available equity, the diligence budget or the probability of execution.

A larger transaction can actually require more preparation because more capital is being placed at risk and the underwriting process is likely to be more demanding.

Nominal size is therefore a poor argument for free advisory work.

The Sponsor Should Have Money at Risk

This becomes particularly obvious in project finance.

A sponsor may seek hundreds of millions of dollars of senior debt while refusing to pay for a feasibility review, financial model work, legal analysis or advisory retainer.

That should concern the adviser.

Development-stage projects generate expenditure before financial close. Engineering, permitting, environmental work, counsel, modelling, insurance advice and lender diligence all have to be funded.

A sponsor without a budget for those costs is presenting an unfinished capital structure.

Financely's separate guidance on project finance advisory retainers addresses this issue directly.

The Same Rule Applies in Trade Finance

Trade finance prospects sometimes believe the short duration of the underlying transaction should make advisory work free.

The adviser may still need to examine purchase and sales contracts, counterparties, documentary structure, bankability, commodity economics, collateral, payment mechanics and the proposed financing facility.

A trader presenting a USD 20 million commodity transaction with no budget for professional execution is still an unfunded client.

Financely has addressed this specifically in why trade finance advisers charge upfront retainers.

The duration of the asset does not eliminate the cost of structuring it.

Success Fees Have a Different Purpose

Success fees compensate the adviser for achieving an agreed financing outcome.

They can align the adviser with the client and reward successful execution.

They do not reimburse every hour spent before closing, especially where the transaction requires extensive preparation.

A typical advisory model can therefore contain both a retainer and a success fee.

The retainer supports the work required to run the mandate. The success fee rewards the result.

Clients sometimes argue that the success fee should be enough because the adviser will earn more if the transaction closes.

That ignores who carries the pre-closing risk.

The client can abandon the transaction. A shareholder can change strategy. A lender can decline. The sponsor can reject the available terms. A project can lose a permit. A counterparty can withdraw. Markets can move.

The adviser has already done the work.

“Pay It From the Loan Proceeds” Solves Nothing

Another familiar response is that the advisory fee should simply be deducted from the financing proceeds.

That works for a success fee payable at closing.

It does not fund work required months before closing.

The same problem appears when a sponsor expects lawyers, engineers, model auditors and independent consultants to wait for debt proceeds before receiving payment.

Those providers have no obligation to lend their fees to the client.

If the transaction cannot fund its pre-closing costs, then the transaction has a pre-closing funding problem.

The adviser should identify that problem rather than conceal it with deferred invoices.

Third-Party Costs Are Particularly Revealing

Arguments over an advisory fee can sometimes be dismissed as price negotiation.

Arguments over every third-party invoice reveal something else.

If the client refuses to pay its lawyer, independent engineer, valuation provider, technical consultant or diligence specialist, the issue is no longer the adviser's compensation model.

The client has not budgeted for execution.

This matters because lenders regularly require independent work before credit approval. Those expenses are part of the financing process whether the applicant likes them or not.

A borrower cannot replace required diligence with indignation.

Upfront Fees Are Not the Same as Advance Fee Fraud

Legitimate concerns about fraud are healthy in financial markets.

Borrowers should know who they are engaging, what work will be performed, how the adviser is compensated and what claims are being made.

Advance fee fraud involves deception. A fee is collected through false representations about financing, instruments, lenders or a transaction that the recipient cannot or does not intend to perform.

A disclosed professional fee under a defined advisory engagement is a different commercial arrangement.

Law firms use retainers. Consultants invoice for diligence. Engineers charge for technical work. Investment banks and debt advisers charge retainers, work fees and transaction fees under agreed mandates.

Calling every upfront professional fee a scam is not sophisticated risk management. It usually indicates that the prospect has not distinguished professional advisory work from a promise to sell money.

The Fee Also Tests Authority

A modest retainer can expose whether the person presenting the transaction actually controls it.

An intermediary may describe itself as the mandate holder and still have no authority to approve professional expenses, sign an engagement letter or provide confidential documentation.

When asked to authorize a fee, everything suddenly has to go “back to the principal.”

That matters.

If the person engaging the adviser cannot bind the client, the adviser needs to know before devoting resources to the transaction.

The problem is particularly acute in commodity trading, project development and cross-border transactions where several consultants or brokers may be sitting between the adviser and the actual decision-maker.

Future Deal Flow Is Not Payment

Weak prospects also like to sell the adviser on the relationship.

There is supposedly another transaction behind the current one. Then three more projects. Then an entire portfolio. The first mandate is presented as an audition for an enormous future pipeline.

Professionals should treat those statements as what they are: possible future business.

They do not finance the current engagement.

A serious advisory firm allocates resources based on signed mandates, current economics and execution probability. Future opportunities can be considered when they become real.

Otherwise, the firm eventually becomes very busy servicing people who promise deals rather than clients who execute them.

Free Work Distorts the Client Base

There is another practical problem with extensive free review.

It attracts people whose entire business model depends on obtaining free professional labor.

They send the same transaction to multiple firms and ask each one to review it. They collect lender names, structural ideas, comments on documentation and market feedback without engaging anyone.

The adviser doing the most free work rarely wins the best client. It often wins the prospect requiring the most additional free work.

Paid qualification changes the composition of the pipeline.

It favors parties capable of making a commercial decision and filters out many of the files being circulated speculatively.

Advisory Capacity Has an Opportunity Cost

A financing firm does not have unlimited execution bandwidth.

An analyst reviewing an unpaid speculative submission is not working on a paying mandate. A senior adviser restructuring an unqualified project is not negotiating an active lender term sheet. A lender relationship used on weak dealflow becomes less responsive the next time it is needed for a strong transaction.

This is why pricing and qualification cannot be separated from execution quality.

Paying clients should not subsidize applicants who refuse to pay for their own transaction preparation.

Lender Relationships Need Protection

Institutional lender access is not a mailing list.

Credit teams remember the quality of the transactions they receive.

An adviser that repeatedly sends incomplete, poorly structured or commercially unrealistic files eventually loses attention. Emails are ignored. Calls are returned less quickly. The adviser becomes associated with unfiltered dealflow.

That damages every future mandate.

Review fees and retainers support the screening process that protects those relationships.

The adviser should be able to say no before the lender has to.

Good Clients Usually Understand the Economics

Strong borrowers negotiate fees. Sophisticated clients negotiate everything.

The difference is that the discussion usually concerns scope, responsibility, timing and commercial value.

They want to understand what the adviser will do, how the process will be run and how compensation changes if the transaction progresses.

They do not expect an advisory firm to absorb months of execution cost simply because the requested financing amount is large.

The existence of an advisory budget also tells the market something about the client.

It suggests the company has internal authority, has considered transaction costs and can deploy capital before financing proceeds arrive.

Those qualities matter during execution.

When a Prospect Refuses to Pay

A refusal does not automatically mean that the underlying transaction is fraudulent.

The prospect may prefer a different fee model. The project may be too early. The intermediary may lack authority. The company may have insufficient liquidity. Management may simply disagree with the adviser's economics.

All of those are legitimate reasons for the parties not to work together.

The mistake is assuming the adviser must continue negotiating until the prospect agrees.

Some enquiries should end.

Our Position Is Straightforward

There Is Nothing to Apologize For

Professional advisory work costs money.

So does legal work. So does diligence. So does engineering. So does underwriting.

A company seeking institutional capital should budget accordingly.

Financely is comfortable losing prospects who require free review, free structuring and free distribution before they will consider becoming clients.

That capacity is better allocated to companies that have a live transaction, decision-making authority and the financial resources to execute it properly.