Raising Money? Sources and Uses of Funds

Sources and uses of funds

Proposal being made by business owner to a wealthy investor who could provide business funding for her growing  business venture.

Have you recently tried to get a bank loan or raise funds from friends and family, angel investors, small private equity funds or other sources? Did it just not go well? If so, read on for assistance. A company that I previously sat on the board of was raising funds to pay for another production run of their health food product and for a marketing push (i.e., uses of funds). The company had a well-written business plan and a separate executive summary.  It was soliciting money from angel investors whom the founders and board knew fairly well.

Moving from people you know well to minimal or non-relationship investors

This company had raised money before. The founders had also contributed a significant amount of capital and a great deal of their time handling all the roles and responsibilities involved in a start-up. Then, of course, they needed more money to grow. They reached out to people they knew – friends and friends of friends – and then crossed the line out of the friends and family realm. When you do that, there are things that ANY interested party wants to know. Your friends may be forgiving but those who do not know you typically are not. Chief among what they want to know are the sources and uses of the funds you are requesting.

In any business plan or executive summary submitted to a person or an entity interested in investing, you need to include a discussion regarding how much the company has raised to date from its founders ($ amount) and others ($ amount). If your company has been in business for years, you need to provide the shareholder equity information (owner/investor contributions and retained earnings) from the balance sheet. Prospective investors and lenders want to know how much “skin in the game” you have put in, whether directly through contributions or through profits generated by the business.

Equity firms

Equity investors need certain assurances to entice them to invest.

What did you use the money for? What will you use this money for?

What was the money raised or borrowed in the past used for? How has the company benefited from those funds? How will you use the money I or my firm is investing? Investors and lenders both need a discussion of how much money has been spent to date. How much more is needed and over what time span will that money be used? Do you intend to seek more investments in the future, after this round? If so, when and how much?

Prospective investors also want to compare how much equity they will obtain in relation to what others who injected capital  received. For example, I”ll put in $50,000 for a 5% stake but others who put in $25,000 six months ago also received a 5% stake. Why is that? Is the company more valuable now?

Answer the above questions succinctly in 2-3 paragraphs. Include financial performance and projections that support what you’ve written. Thus, you will alleviate many of the initial concerns; this will help you attract interested investors and the funding you seek. (Assuming, of course, that the money was well spent and helped grow the business. If not, that’s a different discussion!)