Definition - What does Standby Fee mean?
A standby fee is a fee paid to the underwriter of a share offering in exchange for an agreement that the underwriter will purchase any stock that is not bought by investors during a share offering. In other words, some underwriters agree to buy the unsold shares in return for a fee that is usually charged as a percentage of the underwriting commitment.
Divestopedia explains Standby Fee
The standby fee is a part of the standby commitment. In every share offering, the underwriter and the company that is offering its shares enter into an agreement called the standby commitment. Under this commitment, the company guarantees a certain fee to the underwriter regardless of the shares that are sold. This is called the standby commitment, which means the underwriter and the company stick to each other regardless of the outcome. Since both of them need to get compensation for their efforts, this commitment is enforced. This commitment is the minimum compensation that the underwriter gets and any extra payment depends on the nature of the agreement. Some companies may pay a higher standby fee to underwriters, provided they guarantee to buy the unsold shares.
Besides shares, a standby fee is also used in loan agreements. This is the sum of money that is given to the lender by the borrower for the commitment extended by the former to provide the loan. If the loan is not closed within the stipulated period or if the borrower violates any of the terms and conditions, then this standby fee must be forfeited in favor of the lender.
For example, the developer of an apartment community takes a standby loan from a lender by paying a standby fee. The developer believes that the lending rates will fall during the construction period, so a permanent loan may be arranged with better terms. If the terms are favorable and the developer goes for the permanent loan, then he/she must forfeit the standby fee. This fee is a compensation given to the lender for standing by the borrower. On the other hand, if the developer sticks to the loan terms agreed to by the lender and borrower, then the standby fee is not forfeited.
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