Glossary · broker

Good faith deposit

Also called commitment deposit, due diligence deposit, advance fee.

Money a borrower is asked to pay before funding, nominally to cover third-party costs or demonstrate commitment, and the single most common shape taken by advance-fee fraud in commercial finance.

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What it means

There are legitimate versions. A commercial real estate lender takes a deposit to pay for an appraisal, environmental report and title work, all of which cost real money before anyone knows whether the deal closes. An SBA lender charges a packaging fee. An equipment lessor takes a documented first-and-last payment. In each case the money buys an identifiable third-party service and the invoice can be produced.

Then there is the other version: a caller offering unsecured working capital who needs a wire before the funds release. Small-business working capital, merchant cash advances and most receivables funding do not require the merchant to send money upstream. The funder's costs come out of the funding, not out of your bank account.

How to read the paperwork

  • Does the deposit agreement name the specific third-party reports it pays for, and does it require those reports to be ordered within a stated period?
  • Is any part refundable, and on what conditions? "Refundable if we decline" is worth little when the agreement also says the deposit is earned on receipt or forfeited if the borrower fails to supply any requested item
  • Who holds it — the lender, an escrow agent, or the broker personally?

Regulation

Several states regulate or prohibit advance fees charged by loan brokers, and the rules differ substantially between them. Some require a licence, some require the fee to be held in trust, some ban it outright for certain transaction sizes. Whether a given deposit is lawful depends on the state, the amount, the product and who is collecting it.

Where this one catches people

"Refundable" is a drafting word, not a promise. The refund condition is usually written so that the deposit is forfeited if the borrower withdraws, fails to provide a document, or does not close by a date — and the date is controlled by the party holding your money. Read the forfeiture clause before the refund clause; the forfeiture clause is the operative one.

Where you will meet this term

Working Capital Term Loan SBA Loan

Read next

Commitment feeA charge for the lender's promise to lend, calculated on money you have not borrowed — either up front on the… Independent sales organization (ISO)A sales firm that originates funding applications and places them with funders for a commission — the party m… Letter of intent (LOI)A short document setting out the principal terms of a proposed deal, mostly non-binding on the commercial ter… Loan brokerAn intermediary who places a borrower's file with lenders for a commission, sitting between the business and … Origination feeA charge for putting the transaction on the books, usually deducted from the disbursement rather than billed,… Term sheetA summary of proposed terms issued before contract documents, mostly non-binding as to the financing itself b…

Good faith deposit — common questions

What does good faith deposit mean?

Money a borrower is asked to pay before funding, nominally to cover third-party costs or demonstrate commitment, and the single most common shape taken by advance-fee fraud in commercial finance.

Where does good faith deposit catch people out?

"Refundable" is a drafting word, not a promise. The refund condition is usually written so that the deposit is forfeited if the borrower withdraws, fails to provide a document, or does not close by a date — and the date is controlled by the party holding your money. Read the forfeiture clause before the refund clause; the forfeiture clause is the operative one.

Is good faith deposit the same as an interest rate?

Good faith deposit is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does good faith deposit apply to?

Working Capital, Term Loan, SBA Loan.

Is there a worked example of good faith deposit?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside good faith deposit?

Commitment fee, Independent sales organization, Letter of intent, Loan broker, Origination fee.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.