Definition of Use of Funds. What is it?
Use of funds describes what money is being used for. In most cases, use of proceeds is asked by lenders considering making a loan to a potential borrower.
Example:A business applies for a small business loan. One of the requirements is for the owner to explain how the business will use the money. For example, buying equipment, inventory and hiring workers are all considered good reasons.
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How to best explain what your business needs the money for:
We can 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? For businesses doing well, the need for money is usually good. When businesses are having problems, then the reasons for the loan request are usually to fix problems. When a business is in trouble, lenders think they may not be repaid and the chances of going past due or 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. Click on the menu at the top for a bank statement loan.
Explaining how your business will use the money is also required for funding programs such as a loan against equipment, an asset based loan. So you don’t have a good explanation and you need to close a business loan? What should you do? Then apply for one of the different types of business loan, or use the money in the business for another reason.
Sometimes business owners just do not explain their use of funds to the lender well enough and get declined. Need help explaining your use of proceeds to be approved for a business loan? Contact us above or call Tel: 919-771-4177.
What are acceptable and often unacceptable use of funds for a business loan?
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. Another list of not good business loan uses are paying business rent or mortgage, paying existing business 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. If it won’t, it prevents businesses from getting loans and having a hard time repaying.
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