Friday, August 27, 2010

Sources and Uses of Funds

Have you recently tried to get a bank loan or raise funds from friends and family, angel investors or other sources? Did it just not go well? If so, some help is on the way. The company I referenced yesterday is trying to raise funds to pay for another production run of their health food product plus pay for a marketing push. They have a business plan and are soliciting money from angel investors whom they know fairly well. Before I continue, you should know as an FYI, you can obtain financing from up to 35 investors who are not what the SEC (Securities and Exchange Commission) considers sophisticated investors. I'll come back to this later but you should know this up front.

This nascent small business has raised money before. The founders have 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. Now they need more money. They are reaching out to people they know - friends and friends of friends - and are just about to cross the line out of the friends and family realm. When you do that, there are things that ANY interested party wants to know. Chief among those are sources and uses of funds.

In any business plan or executive summary submitted to someone 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). Investors and lenders want to know how much "skin in the game" have you put in. They also want to compare how much equity they are getting in relation to what others who injected capital received. I"ll put in $50,000 for a 5% stake but others who put in $25,000 six months ago also got a 5% stake. Why is that? What has the money raised or borrowed in the past been used for? How has the company benefited from those funds? How will you use the money I'm investing? Investors and lenders need a discussion of how much money has been spent to date. How much more is needed, now and later, and what will that be used for? What was the money used for in the past?

Answer these questions succinctly in 2-3 paragraphs in a section entitled "Sources and Uses of Funds". Include financial performance and projections that support what you've written. You will subsequently go a long way to alleviate the concerns and attract 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!)
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