Growth almost always requires capital. But how you bring that capital into your business matters just as much as how much you raise. The mix of debt and equity you choose can either give your business room to breathe, or quietly box it in.
That’s where understanding the capital stack, today’s financing options, and your own readiness comes into play. When these pieces line up, capital becomes a strategic tool, not just a funding event.
Understanding the Capital Stack (& Why It Matters)
At its core, the capital stack is simply the hierarchy of how a business is financed. Each layer comes with its own balance of risk, return, and control. Understanding those trade-offs is key to building a structure that supports growth without sacrificing flexibility.
At the base of the stack is senior debt. This is typically the lowest-cost capital available, secured by assets or cash flow and governed by strict covenants. It’s efficient, but it comes with rules that truly matter when performance fluctuates.
Above that sits mezzanine or subordinated debt. This layer is more expensive and often partially unsecured, but it buys flexibility. It may include features like Payment-in-Kind (PIK) interest or warrants, which can ease short-term cash pressure while supporting longer-term growth.
Next is preferred equity, a hybrid option that provides capital without voting control. Investors receive priority distributions, but ownership dilution is typically more controlled than with common equity.
At the top is common equity, which is true ownership capital. It carries the highest risk and the highest return potential, making it powerful for long-term growth, but it also means sharing control and upside.
The “right” layer depends on where your business is today, how strong the balance sheet is, and what you’re trying to accomplish in the near term. The goal is maximizing stack efficiency, or the value you get from each dollar of capital relative to its impact on strategy.
Traditional Bank Financing vs. Private Credit: A Shifting Landscape
As bank underwriting standards tighten, many middle-market companies are discovering that traditional bank financing isn’t always the most practical option, even if it’s still the cheapest on paper.
Banks generally offer the lowest cost of capital, often tied to SOFR plus a margin. But that affordability comes with tighter leverage and coverage covenants, longer closing timelines (often 45 to 90 days), and less flexibility due to regulatory constraints. Banks tend to focus heavily on hard collateral and historical cash flow, and relationships are often built around periodic renewals rather than ongoing advisory support.
Private credit funds and non-bank lenders, on the other hand, approach financing differently. Rates are higher (often in the 12% to 20% range) but deals close faster, structures are more customized, and covenants are often lighter or performance-based. These lenders are more willing to underwrite forward-looking cash flow, enterprise value, and contractual revenue, making them attractive for companies in transition or high-growth phases.
Private credit isn’t a “last resort.” For many businesses, it’s right-sized capital—designed to meet them where they are, not where a credit policy says they should be.
Preparing Your Business for Financing Starts Earlier Than You Think
Successful financing starts with preparation months before the lender meeting.
Lenders want clean, consistent financially, typically three years of GAAP or tax-basis statements with clearly reconciled EBITDA and thoughtful management commentary. They also want to see forward-looking cash-flow projections, usually covering 12 to 24 months, that demonstrate the business can comfortably service debt.
Beyond that, working capital tells a story. Receivables aging, inventory turns, and vendor terms all reveal how cash actually moves through the business. A clear capital expenditure plan shows where investments are going and why they matter. And a well-organized debt schedule, along with evidence of covenant compliance, builds credibility quickly.
Most importantly, strong borrowers translate numbers into narrative. Instead of just handing over statements, they explain where the business has been, how it performs today, and exactly how new capital will be deployed. That clarity shortens diligence timelines and builds lender confidence.
Choosing a Capital Structure That Supports the Long Game
Every financing decision should tie back to strategy. Before adding leverage or issuing equity, it’s worth asking a few critical questions.
How will additional debt affect debt service coverage and liquidity? Would interest-only periods or step-up amortization better align with cash-flow cycles? Is equity dilution justified if it reduces risk or accelerates growth meaningfully?
A simple framework can help bring discipline to these decisions:
- Clearly define the business objective (growth, stability, or transition).
- Match that objective to the appropriate layer in the capital stack.
- Model coverage, downside, and exit scenarios.
- Review tax, ownership, and control implications before committing.
When done well, the result is capital that moves in sync with your business. Structures that work with your company’s rhythm, not against it, create the foundation for sustainable growth and smarter decision-making.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
