Workshop14 min readFocus · October

Capital Stack Strategy

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

Focus for October

Lender education for the plan ahead

October: brief the lender on next year's plan before they ask.

Refreshes on the 1st of every month

Walk the banker through next year's plan, the major capex, and the working-capital pattern. Lenders that understand the plan before it begins are more flexible when it bumps.

Pre-year lender meeting calendared
1-page plan summary prepared
Capex and WC pattern explained
Covenant headroom discussed openly

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

More for Scaled Operator

Keep reading.

Playbook

EBITDA Quality Workbook

Add-backs, normalizations, and how a buyer will read your P&L.

Read →

Guide

Building a People Operating System

Comp bands, leveling, and performance at 100+ headcount.

Read →

Template

Three-Statement Model

Driver-based forecast linking ops decisions to cash.

Read →