Capital Stack: Understanding Business Financing Layers
Learn what a capital stack is, how different financing sources rank, and why understanding capital structure matters for your business.
What Is a Capital Stack?
A capital stack is the complete structure of all capital sources funding a business or project, arranged by priority of repayment. In the event of liquidation, those at the bottom of the stack (senior debt) get paid first, while those at the top (equity) get paid last.
Understanding the capital stack helps business owners recognize how different financing types interact and which investors or lenders have priority claims on business assets.
Typical Capital Stack Layers
From highest priority to lowest:
| Layer | Priority | Risk/Return | Examples |
|---|---|---|---|
| Senior Debt | First | Lowest risk/return | Bank loans, SBA loans |
| Mezzanine Debt | Second | Medium risk/return | Subordinated loans |
| Preferred Equity | Third | Higher risk/return | Preferred stock |
| Common Equity | Last | Highest risk/return | Owner investment, stock |
Why Capital Stack Matters
Understanding your capital stack is important for several reasons.
- Affects borrowing capacity and available financing options
- Determines cost of capital at each layer
- Influences lender willingness to provide financing
- Impacts personal liability and risk exposure
- Affects control and decision-making authority
Optimizing Your Capital Stack
A well-structured capital stack balances cost, risk, and flexibility.
- Use lowest-cost senior debt where possible
- Maintain adequate equity cushion
- Consider mezzanine for growth without dilution
- Match financing term to asset or project life
- Preserve capacity for future needs
Most small business lenders expect owners to have 10-25% equity in the capital stack. Higher equity positions improve loan terms and increase approval chances.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.