Sources and uses: the first page of any capital plan

Every capital plan starts with two questions. How much money does the transaction need, and where will each dollar come from? A sources and uses table answers both on one page. Lenders and capital partners read it first. Owners who build it early tend to have clearer conversations and fewer surprises at closing.

What a sources and uses table is

It is a simple two column summary of a transaction. One side lists every place the money goes. The other side lists every place the money comes from. The two totals must match exactly. If they do not, the plan has a gap that someone will have to fill.

The format is the same whether the transaction is a business acquisition, a new facility, an equipment purchase, or a partner buyout. Only the line items change.

The uses side: where the money goes

Most owners start with the headline number, such as the purchase price. That is rarely the full picture. A complete uses side usually includes:

• The core cost. Purchase price, construction budget, or equipment cost.
• Closing and financing costs. Lender fees, legal fees, appraisal, environmental reports, title, and third party reports.
• Working capital. Cash the business needs on hand after closing to cover payroll, inventory, and receivables while revenue catches up.
• Reserves. Interest reserves, capital expenditure reserves, or other amounts a lender may require to be funded at closing.
• Contingency. A cushion for costs that run over budget or arrive late.

Leaving out working capital is one of the most common mistakes. A business can close on an acquisition and still be short on cash in its first few months. Lenders notice when that line is missing or thin.

The sources side: where the money comes from

Sources are listed in order of priority, starting with the capital that gets repaid first. A typical sources side may include:

• Senior debt. A bank loan, SBA loan, or other first position financing.
• Subordinate capital. Seller financing, a second lien, or mezzanine debt, where available.
• Equity. Cash from the owner or partners, retained earnings from the business, or outside equity.
• Other sources. Earnouts, rollover equity from a seller, or credits negotiated at closing.

Each line should reflect what that source will realistically provide. Senior debt is sized by the lender's own tests, not by what the owner hopes to borrow. Seller financing depends on what the seller will accept. Owner equity should be cash that is truly available, not cash the business needs to keep operating.

How lenders and partners read it

A capital provider uses the table to answer a few questions quickly:

• How much of the total is the owner contributing?
• Is the senior loan sized within the lender's normal limits?
• Are closing costs and reserves accounted for, or will they appear as a surprise?
• Does the business have enough cash left after closing to operate?

A table that is complete and conservative signals preparation. A table with round numbers and missing lines suggests the plan has not been tested yet.

When the two sides do not match

If uses exceed sources, the plan needs work before it goes to market. There are a few ways to close a gap:

• Reduce the uses by negotiating price, phasing the project, or trimming scope.
• Increase owner equity or bring in a partner.
• Ask the seller to carry part of the price.
• Add a layer of subordinate capital, accepting the higher cost that comes with it.

Each option has tradeoffs in cost, control, and risk. The right mix depends on the business, the owner's goals, and what the capital markets will support at the time. Working through those tradeoffs on paper is far easier than doing it during a lender's review.

Closing thought

A sources and uses table is not a formality. It is the first test of whether a transaction holds together. Building it before talking to lenders gives an owner a clearer view of the plan and a stronger starting position. Our capital stack tool can help you lay out the layers of a transaction. If you would like a second set of eyes on your plan, contact us for a confidential conversation.

Thomas Capital Holdings is not a registered investment adviser and does not provide investment advice or recommend securities. Consult your own advisors about your situation.