Use of Funds

Use of Funds along with The Sources for the funding is an important part of attracting accredited investors or lenders to finance your business needs.  The Use of Funds statements can use to show a lender how much you need for startup or growth and how much collateral you will contribute. Lenders like it because it is an excellent summary of your financial plan and helps to fill in some of the gaps within financial sheets.

Uses of Funds and The Sources Statement

1. Uses of Funds: Money is needed for a variety of purposes for a business to startup or grow, including beginning quantities of new product inventory, shipping fulfillment and office supplies, new or modification of equipment, and additional furniture needed.  Purchase of a new building/land or leasing with costs of deposits for rent, and other facility related costs.  Advertising and marketing to help promote your new idea or company.  New technology upgrades for phones and computers to go paperless or to expand the infrastructure to handle the increasing volume of sales.  These are just a few examples of how more funding will help your business start or grow.

2. Sources of Funds: Where the money for all the Use of Funds is going to come from including what you now have and what you need from them to cover the total amount needed.. You will probably have a mix of different funds for different parts of your plan. For example, you may be contributing office furniture and office supplies yourself, getting a lease for purchasing major equipment, and getting a secured loan as a line of credit for working capital.

 Steps in Creating a Sources and Uses of Funds Statement.  

  1. Start with figuring out how much money you will need and how you will “Use of Funds”.

  2. Create worksheet with subcategories such as facilities, equipment, marketing, advertising, supplies, people, etc, that are needed for you to launch your business or in growth situations where cash flow shortfalls occur such as payroll processing cycles.  Then in your worksheet fill in each category subtotals with how much you need for: Facilities, Equipment and Vehicles, Supplies and Advertising, and Other Operating Costs. Total these numbers.
  3. In the Uses of Funds section, include an estimate of your Working Capital needs – that is, the amount of money you need to have on hand to pay bills while you are establishing your business.
    3. The total of startup funds plus the working capital needs is the total Uses of Funds.
In the Sources of Funds section, list all the sources of funds you can provide, as collateral for the loan you are seeking. This might include equity in your home, a savings account, an IRA (you don’t have to cash it in, just be willing to let the bank take it if you can’t pay on your loan).
The difference between the total Uses of Funds from section one and the total collateral you are providing equals the amount of financing needed.

An Example of a Sources and Uses of Funds Statement

Uses of Funds
Facilities Costs $120,000
Equipment and Vehicles $325,000
Supplies  $10,000

Marketing and Advertising $49,000
Other Startup Costs $13,000
Total Startup Costs $507,000
Working Capital Required $100,000
Total Uses of Funds $607,000

Sources of Funds
Owner Collateral: 
Retirement Accounts: $50,000
Owner Bank Savings: $10,000
Home Equity Line: $30,000
Total Collateral: $90,000
Total to be Financed:  $517,000
Total Sources of Cash $607,000

This statement does not have to be complicated; it is just meant to show a lender how much you need for financing, what you have as collateral, and the amount of loan you need. In some cases, you may not actually be putting the money into the business (if you have an IRA, for example); you are just showing the bank what you can do if you are in trouble on the loan.