Definition of Use of Funds. What is it?
Use of funds describes what money is being used for. Lenders want to know what your business is going to do with the money. They consider some reasons good and some bad. Bad reasons may cause a decline.
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Example: A company applies for a small business loan. One of the requirements is for the owner to explain how it will use the money. For example, buying equipment, inventory and hiring workers are all considered good reasons.
How to best explain what your business needs the money for:
We can help you evaluate your use of proceeds. Is it for good reasons, or will the lenders not like why your business needs the money and decline your request? When things are going well, the reasons for needing funds are usually good. Once there are problems, then it may be for fixes, like back taxes. After a company is in trouble, lenders think the debt will not be repaid and the chances of going past due and defaulting are high.
Is your use of funds a problem for the lender? Then look at other business loan options. For example, bank statement loans do not require explaining what you will use the money for.
Explaining how your company will use the money is also required for funding programs such as money against equipment, an asset based loan. So you don’t have a good explanation but still need business funding? Choose from several other options.
Sometimes companies just do not explain their use of funds to the lender well enough and get declined. Need help explaining your use of proceeds? Contact us above or call Tel: 919-771-4177.
What are acceptable and unacceptable use of funds?
Acceptable reasons include:
Expansion, Inventory, equipment and hiring employees. Another set of good reasons also include marketing, advertising, training, new product lines and location upgrades.
Use of funds decline reasons by some business lenders are:
Money for payroll, paying bills, paying suppliers, and paying taxes. More reasons lenders do not like are paying business rent or mortgage, paying existing commercial loans and past due accounts.
Why do lenders want a use of proceeds explanation?
So why do lenders care what the money is being used for? Because it helps them decide if the money will improve your business, or not.
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Recent examples also from the Web or in the news: