Debt Capacity Modeling: Sizing Leverage in High-Growth Companies

High-growth companies are like sports cars—built for speed but prone to skidding if overleveraged. Debt capacity modeling ensures that companies strike the right balance between leveraging their growth potential and avoiding financial strain.

What is Debt Capacity Modeling?

Debt capacity modeling determines the maximum sustainable debt a company can take on without compromising its operational and financial health. For high-growth companies, this involves evaluating their cash flow projections, growth rates, and risk profile while accounting for market conditions and lender appetite.

Key Factors in Sizing Debt for High-Growth Companies

1. Cash Flow Volatility:
2. Debt Service Coverage Ratios (DSCR):
3. Growth-Focused Investments:
4. Industry-Specific Risks:

Example: SaaS Company Debt Capacity Analysis

A SaaS company with:

• $50 million in ARR growing at 40% annually.
• $15 million in EBITDA.
• Free cash flow (FCF) of $12 million.

Using a DSCR of 2.0x, the maximum annual debt service would be $6 million. At a 6% interest rate and a 7-year amortization, the company could comfortably sustain ~$35 million in debt. However, the model must account for churn, delayed collections, and high reinvestment needs.

Why It’s Crucial for High-Growth Companies

• Avoid Over-Leveraging: Prevents financial distress when projections fall short.
• Preserve Flexibility: Ensures funds are available for growth opportunities.
• Attract Investors: Balanced leverage enhances investor confidence in the company’s long-term viability.

Conclusion

Debt capacity modeling is not just about crunching numbers; it's about enabling sustainable growth. For high-growth companies, the key is to harness debt as a growth accelerator, not a handbrake.