Strategic Borrowing – Turning Debt into a Growth Engine
Key Points
- Debt should accelerate cash flow; DSCR measures true debt capacity.
- The working capital cycle (DIO + DSO – DPO) drives liquidity; shorter cycles support more debt.
- Speed of capital often outweighs cost of capital — SBA’s low APR can arrive too late, while fast funding preserves margin.
- Sequence capital: equity, asset sell-down, ABL, or factoring before waiting on SBA.
- Capital Source evaluates both debt cost and opportunity cost, showing which option delivers real profit.
Introduction
Business owners often fixate on interest rates. On paper, an SBA loan at 11.5% looks like a bargain compared to a bridge loan at a factor of 1.33 (~34% APR).
But under SOP 50 10 8 (June 2025 updates), SBA approvals can take 90–180 days. For a $588K loan, that wait can cost $500K in lost gross margin. Suddenly the “cheap” option doesn’t look so cheap.
Fast funding, while carrying a higher sticker cost, puts capital to work today — often generating more profit than it consumes. At Capital Source, we measure this through what we call the True Cost of Money.
The True Cost of Money
Formula:
True Cost = Debt Cost + Lost Opportunity
Case Example ($588K loan, $500K lost GM)
- SBA Loan (11.5% APR):
- $588K loan → ~$67K annual debt service.
- Approval delay: 6 months → $500K lost margin.
- True Cost = ~$567K.
- Bridge Loan (1.33 factor ≈ 34% APR):
- $588K loan → ~$200K cost.
- Funds in days → $500K captured margin.
- Net = +$300K profit.
Beyond EBITDA: Why DSCR Matters
Traditional lenders size debt on EBITDA, which ignores receivable and inventory drag. DSCR (Debt Service Coverage Ratio = CFADS ÷ Annual Debt Service) uses actual cash flow, making it the better metric for real repayment ability.
What is CFADS?
CFADS = Cash Flow Available for Debt Service
It’s the amount of cash a business has left to pay interest and principal on its debt after covering operating expenses, taxes, and changes in working capital.
Formula (simplified):
CFADS = EBITDA − Taxes Paid − CapEx (if maintenance) − Working Capital
Why it matters:
- More accurate than EBITDA: EBITDA is accrual-based and ignores cash tied up in receivables/inventory. CFADS reflects actual cash available.
- Used in DSCR: Lenders use CFADS in the Debt Service Coverage Ratio (DSCR = CFADS ÷ Debt Service) to test repayment capacity.
- Capital planning tool: Helps business owners decide if they can take on more debt without stressing liquidity.
Illustrative Example
| Metric | Amount ($M) | Notes |
|---|---|---|
| Reported EBITDA | 2.0 | Accrual-based |
| Working Capital Drag | -1.0 | Slow inventory/receivables |
| LCM Markdowns | -0.3 | Inventory writedowns |
| CFADS | 0.7 | Actual cash available for debt |
SBA vs. Capital Source’s Facility: Side-by-Side
Comparison Table (Loan Example: $588K)
| Feature | SBA Loan (11.5%) | CSG Bridge Facility (1.33 Factor) |
|---|---|---|
| Approval Time | 90–180 days | 3–5 days |
| Loan Size (Example) | $588K | $588K |
| Annual Debt Service | ~$67K | ~$200K |
| Lost Opportunity | $500K | $0 |
| True Cost | ~$567K | Net + $300K profit |
Working Capital Cycle
| Metric | Days | Impact |
|---|---|---|
| DIO | 150 | Inventory hold time |
| DSO | 55 | Collection time |
| DPO | 30 | Payment delay |
| CCC | 175 | Total cycle |
Key to Acronyms
- DIO = Days Inventory Outstanding
- DSO = Days Sales Outstanding
- DPO = Days Payables Outstanding
- CCC = Cash Conversion Cycle
Structuring Debt for Success
- Quantify CFADS, not EBITDA.
- Map DIO, DSO, DPO for bottlenecks.
- Stress test payments under both SBA and bridge scenarios.
- Sequence funding: equity → asset sales → ABL/factoring → bridge → SBA refinance.
- Always calculate True Cost = Debt Cost + Opportunity Cost.
Conclusion
The SBA loan looks cheap, but the hidden cost is time. Every month spent waiting erodes profit. Bridge and factoring may carry higher rates but often deliver net gain by protecting margin.
Q&A
Q: Why is DSCR better than EBITDA?
A: EBITDA ignores cash drag. DSCR reveals whether you can cover debt service with actual cash flow.
Q: Isn’t SBA always cheaper?
A: On paper, yes. In practice, a $588K SBA loan delayed by 6 months can mean $500K in lost margin, making it far more expensive.
Q: How do bridge loans generate profit despite the cost?
A: They allow immediate action. A $588K bridge loan may cost ~$200K, but it enables capture of $500K in gross margin — leaving you +$300K ahead.
Q: Can fast funding be refinanced?
A: Yes. Use bridge or factoring now, then refinance into SBA once approval comes through.
At Capital Source, we don’t just watch the market — we build financing solutions that adapt with it.
📞 Contact us today to explore options customized to your business needs.
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