Choose equity, debt, or non dilutive funding

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that need a clear funding plan for the next step.

The quick answer

Match the tool to the use of funds and risk. Use a revolving line for working capital tied to receivables and inventory. Use a term loan for equipment or build outs with clear payback. Use equity for step change growth, M and A, or when cash will go negative for a period. Add non dilutive support such as grants or tax credits when you qualify. Blend sources to lower risk.

The method in eight steps

Define the use of funds
Working capital, equipment, build out, expansion, acquisition, or product development.
Score risk and payback
Write how certain the cash returns are and when they arrive. Short and reliable returns favour debt. Uncertain or long returns may require equity.
Pick instruments that fit
Operating line for working capital. Term loan for assets with a known life. Equity when cash goes negative for a period or when you need flexibility. Add grants or tax credits where you qualify.
Match term to asset life
Keep loan length close to the life of the asset so cash coverage stays healthy.
Model headroom
Build base, upside, and downside cases. Show covenant headroom and borrowing base availability across the next four quarters.
Blend sources to reduce risk
Combine an operating line with a small term loan and a modest equity top up if the plan is ambitious. Add non dilutive support to reduce net cash out.
Prepare the lender and investor packs
For lenders lead with coverage ratios, collateral quality, and reporting rhythm. For investors lead with market, unit economics, repeatable growth, and the plan to the next value step.
Set your decision timeline
Work back from the date cash is needed. Include time for term sheets, diligence, and approvals.

Example

A company at twenty two million funded a new line with a term loan and used the operating line for working capital. They added a small equity raise to support entry into a new region along with a provincial tax credit. The blend lowered covenant risk while keeping ownership mostly intact.

Pitfalls and fixes

Choosing an instrument that fights cash timing. Match tool to use and payback.
Focusing on rate only. Compare flexibility, covenants, and speed.
No headroom plan. Model downside and write actions that protect covenants.

Checklist

Use of funds written
Risk and payback scored
Instruments matched to uses
Headroom model across cases
Lender and investor packs outlined
Decision timeline set