If you are applying for a loan or fundraising for equity you will need to describe your use of proceeds: how will you use the money?
Funders will be looking for very specific descriptions that match categories on either your profit and loss statement or your balance sheet. Typically those categories might include:
- specific General and Administrative (such as hiring a CFO)
- Accounts Receivable
In particular funders want to understand how those categories will increase over some reasonable period of time (typically 12 to 18 months) after the funding, versus what you plan to do if you don’t secure the funding. Thus the use of funds for a $100,000 loan might be $40,000 for additional accounts receivable above your current average, $20,000 for additional inventory above your current average, $20,000 of additional equipment and $20,000 for additional marketing expenditures over the next year. You might express this to potential funders as:
- $40,000 Receivables
- $20,000 Inventory
- $20,000 Equipment
- $20,000 Marketing
Use of Proceeds for Working Capital
Alternatively the net changes in accounts receivable, accounts payable and inventory might be expressed as “additional working capital.” That can be a useful way to express the use of proceeds, as a growing business will typically also increase its accounts payable, which decrease the overall need for working capital.