---
title: Capital Strategy
summary: How to fund the path you chose using internal cash, debt, revenue-based financing, or equity.
est_minutes: 20
sort: 3
---

Welcome to Module 4.3.

Capital strategy is the missing piece between strategic intent and operating reality. The path you chose. The math you built. Now: how do you fund it?

By the end of this module you'll have a Capital Strategy Decision, a Capital Plan, a Term Reference for the approach you chose, and an Investor/Lender Profile if external capital is in play.

**The 4 Capital Approaches**

**Approach 1: Internal cash flow only.**

The business funds its own growth. Profit reinvested. Slow. Free. Full control. Most operator businesses default here.

Best for: Lifestyle path, slow scale, strong unit economics, operators with strong control preference.

Limit: speed. You can only grow as fast as cash flow allows.

**Approach 2: Debt.**

Loans (SBA, term loans), lines of credit. Cost: 6–12% interest. Personal guarantee usually required. No equity dilution.

Best for: stable revenue businesses with predictable cash flow, asset purchases, working capital, modest scale acceleration.

Limit: total debt that can be serviced from cash flow. Most operator businesses can carry 1–2× annual EBITDA in debt safely.

**Approach 3: Revenue-based financing (RBF).**

Capital in exchange for a share of monthly revenue until a multiple (typically 1.2–1.5×) is paid back. No equity. No personal guarantee usually.

Best for: subscription / recurring revenue businesses with high gross margins, growing predictably, scaling marketing or hiring.

Limit: makes sense only when CLV/CAC is very strong (5+). Otherwise the repayment burden compresses growth.

**Approach 4: Equity (angel, venture, PE).**

Capital in exchange for ownership %. No repayment obligation. Significant influence on strategy, governance, exit timing.

Best for: Aggressive Scale path, businesses targeting eventual large exit, operators comfortable with reduced control.

Limit: dilution + influence. A 20% equity raise at $2M post-money means new owners on a $400K stake — and they expect a path to scale and exit.

**The Capital Need Model**

How much capital does your path actually need?

Look at the 3-Year Financial Model from Module 4.2. Find the lowest cash point. That's the working capital need.

Then layer in any strategic capital needs:

- **Headcount acceleration:** hiring 6 people in 6 months requires 12–18 months of payroll runway upfront
- **Geographic expansion:** new market entry typically requires 9–18 months of fixed costs before profitability
- **Product/service development:** R&D / new offering build typically 6–12 months of investment
- **M&A acquisition (if applicable):** purchase price + integration costs

The capital need = working capital + strategic capital + 3–6 months of buffer.

If your operating model shows you need $250K to fund the path, your real ask is closer to $375K (with buffer). Operators consistently under-raise.

**Choosing The Approach**

For your path, score the 4 approaches on 5 dimensions: Speed Match, Control Acceptable, Cost Acceptable, Risk Profile, and Operator Fit, then total the scores. Run the scoring for each of the four approaches:

- Internal
- Debt
- RBF
- Equity

Path-by-path defaults (subject to scoring):

- **Lifestyle:** Internal cash flow only
- **Aggressive Scale:** Equity (mostly), sometimes Debt + Equity blend
- **Sell:** Mostly Internal, occasionally Debt for pre-sale margin improvement
- **License:** Mostly Internal, occasionally Equity for brand expansion
- **Expansion:** Internal + Debt blend, occasionally Equity for major geographic moves

But the right answer depends on YOUR business + YOUR operator profile. The scoring exercise produces the answer.

**Capital Term Reference**

For the approach you chose, know the terms you'll see.

**Debt terms to understand:**
- Interest rate (fixed vs variable)
- Term (years to repay)
- Personal guarantee (most operator-business debt requires it)
- Collateral (assets pledged)
- Covenants (financial ratios you must maintain)
- Prepayment penalties

**RBF terms:**
- Revenue percentage taken monthly (typical: 2–8% of revenue)
- Multiple to be repaid (typical: 1.2–1.5×)
- Cap on duration (typical: 36–60 months)
- Whether unused capacity can be drawn later

**Equity terms:**
- Valuation (pre-money vs post-money)
- Ownership % being sold
- Liquidation preference (1× non-participating is standard; anything more is aggressive)
- Anti-dilution provisions
- Board seats / observer rights
- Pro-rata rights (right to participate in future rounds)
- Information rights (what reporting you owe)
- Drag-along / tag-along rights (what happens at sale)
- Vesting on operator equity (yes, often vests anew after a raise)

For most operators considering equity, the most important non-obvious terms are liquidation preference (1× non-participating only — anything else is bad) and information rights (more than monthly reporting is a tax on the operator).

**Investor / Lender Profile**

If you're going external, know your target investor or lender.

**For debt:**
- Local bank vs SBA-preferred lender vs online lender
- Industry experience (do they understand your business?)
- Relationship cost (will you be required to maintain accounts there?)

**For RBF:**
- Lighter Capital, Capchase, Pipe, Founderpath are common
- Compare effective cost (sometimes RBF is cheaper than debt; sometimes more expensive)

**For equity:**
- Angel investors (smaller checks, $25K–$250K, often industry-savvy)
- Venture (usually $1M+, expects path to $100M+ outcome)
- Private Equity (typically $5M+, expects to operate for 5–7 years toward 3–5× return)
- Family Office (varies wildly, often more patient than VC)
- Holding Company (will hold the business indefinitely)

The right investor for an operator business pursuing scale is usually NOT venture capital. It's often a family office or holding company. The patient capital match matters more than the brand of the firm.

**What To Do Right Now**

Six things:

1. **Assess capital need** (Section A). Pull the lowest cash point from Module 4.2's model + strategic capital needs.

2. **Score the 4 approaches** (Section B). 5 dimensions each.

3. **Pick the approach** (Section C). Document the rationale.

4. **Build the Capital Plan** (Section C). Timing, amount, use of funds, repayment.

5. **Build the Term Reference** (Section D). What terms you'll see and what's standard.

6. **Build the Investor/Lender Profile** (Section E). If external capital, who's the right fit.

Take the quiz.

I'll see you in Module 4.4 — Geographic & Vertical Expansion — where we walk the specific playbook if your path is Expansion or if expansion is a sub-strategy within Scale.
