Workshop14 min readFocus · June

Capital Stack Strategy

When to use debt vs. equity vs. retained earnings.

Focus for June

Mid-year capital review

June: half-year is when capital plans go off the rails. Re-anchor.

Refreshes on the 1st of every month

Re-walk the capital strategy against H1 reality. Did funding sources hold? Are leverage ratios trending right? Adjust H2 plans before the year writes itself.

H1 capital actuals vs. plan
Leverage trend reviewed
H2 funding plan revised
Communicated to LT and board

Match capital to the move

Mismatched capital is how good companies get hurt. The instrument should match the cash-flow profile of the use.

Use of funds	Best instrument	Why
Working capital seasonality	Revolving line of credit	Self-liquidating; only pay when used
Equipment purchase	Equipment loan or lease	Asset secures the debt; matched amortization
Real estate	CRE mortgage or SBA 504	Long amortization matches asset life
Acquisition (cash flow positive)	Senior term debt + sub-debt	Predictable cash service
New product development	Retained earnings or equity	Cash-flow timing too uncertain for debt
Pre-exit recap / dividend	Senior + mezz	One-time, high cost OK for liquidity event

What lenders actually look at

Metric	Typical lender threshold	What to know
Senior leverage (Debt/EBITDA)	≤ 3.0x	Banks; sub-debt extends to 4-5x
Fixed charge coverage	≥ 1.20x	Includes principal, interest, capex, distributions
Customer concentration	Top 1 < 20%	Triggers covenants or carve-outs
Revenue trend	Flat-to-up 24 months	Declines kill deals, not just rates
Personal guarantee	Often required <$10M	Negotiate burn-off triggers

When to talk to equity

Growth opportunity exceeds debt capacity
Cash flows are too lumpy or too far out for debt service
You want to take chips off the table (recap)
You need governance/board upgrade as much as capital
Strategic value of partner > cost of dilution

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