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What is a Standby Fee? A Comprehensive Legal Overview
Definition & Meaning
A standby fee is a charge imposed by a bank for its commitment to provide funds that have not yet been disbursed. This fee is typically associated with loan agreements where the bank agrees to lend money at a future date. If the loan is not finalized within a specified timeframe, the borrower forfeits the standby fee. This fee acts as compensation for the bank's readiness to lend, even if the funds are not immediately needed.
Table of content
Legal Use & context
Standby fees are commonly encountered in commercial lending agreements. They are relevant in various legal contexts, particularly in finance and contract law. Businesses often utilize standby commitments when they anticipate needing funds for projects, such as construction or expansion, but wish to secure favorable lending terms in advance. Users can manage these agreements using templates from US Legal Forms, which provide guidance on drafting and understanding loan commitments.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A construction company secures a standby commitment from a bank for a $500,000 loan to finance a new building project. The bank charges a standby fee of $5,000 for this commitment. If the company does not close the loan within six months, it loses the $5,000 fee.
Example 2: A business assumes that interest rates will decrease and enters into a standby agreement with a bank. If the loan is not finalized within the agreed period, the business forfeits the standby fee, which compensates the bank for its commitment. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Standby Fee Regulations
California
Standby fees must be clearly disclosed in the loan agreement.
New York
There are specific limits on standby fees for commercial loans.
Texas
Standby fees may be negotiable and should be documented in writing.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Difference
Commitment Fee
A fee paid to a lender for reserving funds.
Standby fees are for unadvanced funds, while commitment fees may apply to reserved funds.
Origination Fee
A fee charged for processing a new loan.
Origination fees are charged at loan closing, while standby fees are for commitments.
Common misunderstandings
What to do if this term applies to you
If you are considering a standby commitment, carefully review the terms of the agreement, including the standby fee. Ensure you understand the timeframes for closing the loan to avoid forfeiting the fee. If you need assistance, explore US Legal Forms for templates that can help you draft or review your loan agreements. For complex situations, consulting a legal professional is advisable.
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