Costs. The borrower will be responsible to pay its costs plus the legal and out of pocket costs for the lender.
The borrower is typically responsible to pay its and the lender’s legal costs plus any out of pocket costs incurred by the lender. The lender’s expenses could include due diligence trips, consultants (some lenders will bring in an accounting firm to study the financials or audit collateral such as receivables).
We don’t like spending more than necessary to close a transaction. We use outside counsel but have a select group of firms who know our documents well and understand how to work efficiently. We have yet to bring an outside firm in to run our diligence and we don’t charge for our time for the work we do.
Costs will be higher for companies located in multiple countries. If foreign operations are meaningful the lender will want to take security there, which does add to the cost. For startups this often is not the case; foreign offices are typically small and hold no intellectual property. In those cases we have taken a light touch while reserving the right to revisit should the operation become meaningful.
Should legal costs be capped? If both law firms have worked on venture debt transactions and are open to the idea then capping legal costs makes sense. I am of the view that it is important for both sides to agree so that neither is at a disadvantage.
Company tip: If you can't get a cap on legal costs get an estimate and ask for weekly updates on the billing.