Fee letter: Overview, definition, and example
What is a fee letter?
A fee letter is a formal document that outlines the fees and charges associated with a financial transaction, such as a loan, investment, or banking service. It details the types of fees, payment schedules, and conditions under which fees are due. Fee letters are commonly used in loan agreements, investment deals, and advisory services.
For example, when a business secures a loan from a bank, the bank issues a fee letter specifying origination fees, administrative costs, and other charges the borrower must pay.
Why is a fee letter important?
A fee letter provides transparency about costs, ensuring that both parties understand the financial obligations tied to an agreement. It helps prevent disputes by clearly defining when and how fees must be paid.
For SMBs, a fee letter is crucial when negotiating loans, financing deals, or professional services. Without a clearly defined fee structure, unexpected charges can impact cash flow and financial planning.
Understanding a fee letter through an example
A small business applies for a $500,000 loan from a bank. Along with the loan agreement, the bank provides a fee letter outlining:
- A 2% origination fee ($10,000) due at loan closing
- A $500 annual servicing fee
- Late payment penalties if loan payments are missed
In another example, a company hires a financial consultant to assist with fundraising. The consultant issues a fee letter stating that their compensation will include a fixed $5,000 retainer plus a 1.5% success fee based on the amount of capital raised.
An example of a fee letter clause
Here’s how a fee letter clause might appear in a financial agreement:
“The Borrower agrees to pay all fees outlined in the Fee Letter, including but not limited to origination fees, administrative fees, and any applicable penalties. Such fees shall be due as specified in the Fee Letter and shall be considered part of the obligations under this Agreement.”
Conclusion
A fee letter ensures clarity in financial agreements by detailing the fees associated with a loan, investment, or service. It helps businesses plan for costs and avoid unexpected charges.
For SMBs, carefully reviewing and negotiating fee letters can prevent financial surprises and ensure fair terms in business dealings. Clearly outlining fees in contracts promotes transparency and trust between parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.