What it means
When a business raises capital, the people providing it want to know what happens to their money. The use of proceeds section in a business plan or loan application maps out those intentions.
It sorts the planned spending into specific buckets, such as product development, marketing, working capital (the cash that funds day-to-day operations), or debt repayment. This breakdown matters because it builds trust and manages risk.
Lenders and investors use it to decide whether the financing request makes sense. If a company asks for a loan to buy machinery, but the plan shows the money will actually fund day-to-day payroll, financiers will likely reject the proposal because the funding does not match the need.
In practice, businesses must stick closely to the plan they outlined. Major deviations often require formal approval from lenders or investors, and loan agreements may include covenants (binding promises) that restrict how the money can be spent.
Clear tracking ensures accountability and helps management monitor whether the raised capital delivers the return it was meant to. For non-finance managers, understanding this concept helps when preparing budgets for funding requests.
You must justify every dollar, linking capital expenditure (spending on long-lasting assets) directly to growth targets or operational improvements. That link makes your funding pitch far stronger.
Think of the use of proceeds like giving someone money to buy groceries. You expect to see a receipt showing they bought milk and bread, rather than a cinema ticket.
In practice
Real-world examples
Example 1
Techstart, a software company, raises $500,000 from seed investors. Its use of proceeds allocates $300,000 to software engineering, $150,000 to digital marketing and $50,000 to legal fees. The investors can see that 60% of their money goes straight into building the product, which is exactly what they expected to fund.
Example 2
Oak & Iron Furniture secures a $100,000 bank loan. Its use of proceeds specifies $70,000 for a new CNC (computer-controlled) woodworking machine and $30,000 for raw timber inventory. The bank is comfortable because the machine can be held as security for the loan and the timber will turn into sales quickly.
Example 3
GreenLeaf Cafe raises $200,000 from angel investors (wealthy individuals who back early-stage firms). The money funds $120,000 for shop renovations, $50,000 for kitchen equipment and $30,000 for opening stock. The owner reports spending to the angels each quarter against these three lines, so any overspend on renovations is spotted early.
Think of it
Think of the use of proceeds like giving someone money to buy groceries. You expect to see a receipt showing they bought milk and bread, rather than spending it on a cinema ticket.
Formula
Calculation
Total Funds Raised = Research and Development + Capital Expenditure + Working Capital + Debt Repayment
Worked example. A company raises $1,000,000 and plans to spend $400,000 on research and development, $300,000 on capital expenditure, $200,000 on working capital and $100,000 on debt repayment.
- Total allocated = $400,000 + $300,000 + $200,000 + $100,000 = $1,000,000
- Share going to growth (research and development plus capital expenditure) = ($400,000 + $300,000) / $1,000,000 = 70%
- Share going to working capital and debt repayment = ($200,000 + $100,000) / $1,000,000 = 30%
The allocations must add up to exactly the amount raised. If they total $950,000, then $50,000 is unplanned and investors will ask what it is for. If they total $1,050,000, the plan is underfunded by $50,000 and needs either more capital or smaller spending.Case study
Seen in the real world
This is a fictional, illustrative scenario. Brighton Bakery sought a $150,000 expansion loan to scale its wholesale operations. In its loan application, the managing director provided a detailed use of proceeds schedule. It allocated $90,000 to buy a commercial industrial oven, $40,000 to hire two additional bakers and a delivery driver, and $20,000 to build a buffer for initial ingredient purchases. The bank reviewed the plan, verified the equipment quotes, and approved the financing within two weeks.
Because every dollar had a stated purpose, the credit team could judge the risk quickly and did not ask for extra security. After drawdown, the managing director reported monthly to the bank, comparing actual spending with the schedule. The oven came in at $88,000, and the $2,000 saving was moved into the ingredient buffer with the bank's written consent. By sticking to the roadmap, Brighton Bakery avoided cash flow shortfalls, launched its wholesale line within six months and comfortably serviced its loan repayments.
Watch out
Common mistakes
- Vague categories like general corporate purposes instead of specific itemised costs.
- Failing to align the spending timeline with the actual receipt of funds.
- Shifting funds to different projects without getting prior investor or lender consent.
Questions
People also ask
Can we change how we spend the money after raising it?
Minor adjustments are usually fine, but significant changes to the use of proceeds typically require formal approval from your investors or lenders.
Why do banks care so much about this breakdown?
It helps banks assess risk. They want to ensure the money generates enough future cash flow to pay back the loan.
Is working capital a valid use of proceeds?
Yes, funding day-to-day operations is common, especially for growing businesses, provided it is clearly budgeted and justified.