Chapter 9 -
Use of financing

When you ask someone for money, his first question is, “When will you pay me back?” In the business context, that question is answered by the loan agreement and by the lender’s assessment of your financial and management strength, as measured by your business plan, financial statements and other evidence.

Suppose your younger brother asks for $5,000. After you ask when he will pay you back, your next question would be, “What are you going to do with the money?” If he answers, “to help make a down payment on a house,” you might agree to the loan. But if the answer is, “I’m taking it to Las Vegas so I can double it,” there’s a good chance you will say no.

It’s no different in business. A lender or investor wants some assurance that your use of his money is wise. How you plan to spend the money reflects your judgment as a manager and indicates whether your financial position is likely to change. If your proposed venture is highly speculative, the lender may never see the money again — except maybe as a few cents on the dollar in bankruptcy liquidation.

Everything in this section of your business plan is covered elsewhere in the document — in the action plan, the business description or both. In fact, if you prepared your action plan thoroughly, you already have cost figures for most of the activities you plan to finance. The purpose isn’t so much to provide new information as it is to show a different perspective. This section gives the financial backer an itemized list of how you will spend his money.

If you were selling stock, completing this section of the prospectus would be complicated by the fact that you don’t know in advance how much the offering will raise. On the SCOR form, this section — called “use of proceeds” — requires you to estimate spending based on both minimum and maximum proceeds. Separating out all expenses the company incurs in the stock offering itself further complicates matters.

If you are seeking debt financing, however, the task is simpler. Account for any costs associated with your action plan and with any other activities listed in the business description for which you need more money. Assuming you understand your finances, you know what expenses you can cover from normal cash flow and any retained earnings. Beyond that level, you must finance either on a short-term or long-term basis.

List any items that you cannot fund with existing resources, including leases, rent, payment of notes, utilities, payroll, acquisition of equipment or another business, marketing expenses, consulting fees, insurance, retirement of old debt and so on. Be as specific as possible — the address and size of any building you intend to buy or lease, for example — and list the actual agreed-upon price if you have it. Otherwise, assign a reasonable but conservative cost estimate to each item.

For any item you also list in the action plan, make sure you use the same cost assumptions as before. Use the same time frame as your action plan — 12 or 24 months, for example. Your financing terms may extend far beyond this period, but that’s irrelevant; you are outlining your time frame for incurring debt, not repaying it.

Make sure you include adequate working capital. You must be able to cover operating and financing costs on new equipment or facilities until they start producing a financial benefit — additional cash flow, higher productivity or lower unit costs, for example.
The most obvious need for working capital arises when you expand your fleet. If you put a truck on the road today, you can expect that investment to begin producing cash in X days, with X being the average number of days it takes your shippers to pay their freight bills.

Expressed more negatively, for each new truck you buy, you will need enough money to pay all associated operating expenses — driver pay and payroll taxes, fuel and per diems, for example — for X days. And that doesn’t even take into account your likely obligation to make a payment on that new truck — and possibly a new trailer as well — within X days.

This math proves what you already know to be true: Shortening the turnaround on receivables is critical, especially when you are growing. It’s why so many trucking companies are willing to forego a healthy chunk of their operating margins to get immediate cash by factoring their receivables.

If you are dealing with a lender unfamiliar with trucking, he may initially balk at providing working capital. Lenders sometimes view a request for working capital as a sign of weak management control. Be prepared to justify your request by calculating your operating and financing costs between the time of first use and time of first payment.

In Summary
The use of financing section gives a prospective lender a quick summary of why you need financing. Be as specific as possible and include any item listed on your action plan, as well as any current needs that may be reflected in your business description.