You might have seen the term "Sources and Uses of Funds Statement" on a list of financial spreadsheets needed for a bank loan and you wondered what it is. This statement is sometimes called a source and application of funds statement. Some banks require this statement as part of the application process for a business loan.
Large public companies include a Sources and Uses of Funds statement in their annual reports, but even small businesses can find sources and uses statement helpful. The worksheet discussed here is a simplified, slightly different version that you can use to show a lender how much you need for startup financing and how much collateral you will contribute.
Lenders like the Sources and Uses statement because it is an excellent summary of your financial plans, showing where the money you need is coming from and what it will be used for.
Even if you don't need a Sources and Uses of Funds Statement for a lender, consider putting one together. It's an excellent way to strategize on creative ways to finance your business startup or expansion.
The Sources and Uses of Funds Statement
As you can tell from its title, a Sources, and Uses of Funds statement shows the reader the information needed to get the big picture of:
Uses of Funds: The money needed for various purposes for business startup, including
- Beginning quantities of supplies, equipment, and furniture
- Purchase of building and land
- Initial startup costs for rent deposits for rent, initial payments for insurance, etc.
- Other working capital needs
Sources of Funds: Where the money for all funding is going to come from. A traditional statement might include sources like:
- Sales of assets
- Owner contributions
- Sales of stock
- Cash income
You will probably have a mix of different funds for different parts of your plan. For example, you may be contributing office furniture yourself, getting a loan for purchasing major equipment, and getting a line of credit for working capital.
The difference between the uses of the funds and the sources is what you are asking a lender to provide.
Steps in Creating a Sources and Uses of Funds Statement
The format of the Sources and Uses document seems backward: First, the uses of funds are described, then the sources, as if you were talking to a lender about your plans.
Uses of Funds
Section One is "Uses of Funds." The total of startup funds and working capital needs is the total Uses of Funds.
In this section, use the subtotals for each section in your Startup Costs Worksheet: Facilities, Equipment and Vehicles, Supplies and Advertising, and Other Startup Costs. Total these numbers
In the Uses of Funds section, include an estimate of
Capital needed, for investments in buildings, equipment, or vehicles
Working Capital needs, the amount of money you need to have on hand to pay bills while you are establishing your business.
When you create a uses statement, think about what your company needs to create a "profitable and sustainable" business or project. It doesn't matter how the items would be paid for, just that they are needed.
Sources of Funds
In the Sources of Funds section, list all the sources of funds you have for startup. It might include
- Income from shareholders who are investing in your business
- Collateral for the loan you are seeking or from a co-signer
- Other personal sources like equity in your home, a savings account, or an IRA (you don't have to cash it in, just be willing to let the bank take it if you can't pay on your loan).
It's a good idea to include a detailed sheet to explain the specifics of contributions.
Sample Sources and Uses of Funds Statement
This statement does not have to be complicated; it is just meant to show a lender how much you need for financing, what you have as collateral and the amount of loan you need. In some cases, you may not actually be putting the money into the business (if you have an IRA, for example); you are just showing the bank what you can do if you are in trouble on the loan.
|Sources and Uses of Funds Statement - Business Startup|
|Uses of Funds||Sources of Funds|
|Facilities Costs||$120,000||Owner Collateral: IRA||$ 50,000|
|Equipment and Vehicles||$325,000||Owner Savings||$ 10,000|
|Supplies and Advertising||$ 49,500||Home Equity||$ 30,000|
|Other Startup Costs||$ 13,000||Total Collateral||$ 90,000|
|Total Startup Costs||$507,000||Total to be Financed||$517,000|
|Working Capital Required||$100,000|
|Total Uses of Funds||$607,000||Total Sources of Funds||$607,000|
The Uses section is always shown first, then Sources of Funds. The difference between the total Uses of Funds from section one and the total collateral you are providing equals the amount of financing needed. The Sources total must match the Uses total.
Here's a sample Sources and Uses of Funds Statement for a project that involves buying and renovating a building.
Creating Your Sources and Uses of Funds Statement
As you work on putting together this statement, you might want to be creative to find more funding sources. For example, you could do a crowdsourcing campaign (like Kickstarter) for a new product, or find an SBA loan guarantee to help you secure that loan.
Don't forget to include the costs of obtaining these funding sources in your uses of funds section.
Be as accurate and complete as you can be when preparing your Uses of Funds section. Leave no question unanswered. Lenders don't like surprises.