The business has a £14m revenue base, £1.8m EBITDA, and a committed supply contract with a UK top-four grocer that creates a hard obligation to commission a second moulded-fibre production line. The financing requirement of £4.2m sits £1.25m above the covenant headroom available on the existing bank facility, making a single-instrument debt solution structurally impossible without a covenant amendment. The combination stack — £2.6m of asset finance against the equipment and £1.6m of term loan top-up against the soft costs — closes the full requirement without equity dilution, keeps the cap table clean for the Series B in eighteen months, and stays inside the 3.0x covenant ceiling on the bank side, provided the asset finance qualifies for operating-lease treatment and sits outside the net debt definition. The central conditional in this structure is not commercial — it is legal. The operating-lease treatment question must be resolved before any term sheet is signed, because the answer is binary: if the leaseback is pulled inside the net debt definition, the combination breaches the covenant ceiling at the moment of first drawdown, Verdant's consent position hardens, and the non-dilutive path closes. The termination-for-convenience clause and commissioning timing are manageable risks within the structure's existing buffers. The lease treatment is the one assumption the entire structure stands or falls on.
The financing arc here is a textbook equipment build-out: capital goes out in four committed stages tied to supplier and contractor milestones, then sits fully deployed for roughly four months before revenue begins returning. What makes this curve slightly unusual is the front-loaded exposure — the month 3 tranche of £1.8m is by far the largest single commitment, representing 43% of total capex, and it falls before any physical asset is installed and operational. The crossover where incremental revenue covers incremental debt service arrives at month 14, leaving a five-month ramp window between first revenue and debt service cover — a window that will be funded from existing EBITDA rather than new-line revenue.
Capital is at risk from day one, but exposure builds in two major steps: the month 3 equipment delivery commits the business to £2.6m before a single piece of kit is installed, and the month 6 fit-out brings the total to £3.6m embedded in fixed assets with limited liquidation value. Peak exposure of £4.2m is reached at month 9. A lender taking security over the equipment and leasehold improvements holds assets whose forced-sale value is materially below book — specialist moulded-fibre production equipment has a narrow secondary market — which means the security package alone does not fully cover the loan at peak drawdown. A lender will look to the contracted revenue stream and the group's existing EBITDA as the primary repayment source.
The return leg opens at month 10 but does not cover debt service until month 14 — a four-month shortfall window that the existing business must absorb. The covenant crossover at month 14 is the structural hinge of the financing: until that point, debt service is being funded from the group's £1.8m EBITDA base rather than the new line's incremental revenue. Any lender structuring a covenant around a minimum DSCR or interest cover will test against the consolidated group position, which means the five-month ramp does not create a technical breach provided the existing EBITDA holds — but it leaves minimal headroom if the core business softens during the build period.
Two founders hold 58% in ordinary shares. Series A investor Verdant Capital holds 30% on a 1x non-participating liquidation preference, with a board seat and consent rights over new debt above a threshold and new equity issuances. Angels hold 5%. Employee option pool is 7%. An equity round is explicitly off the table — the business is protecting the cap table for a Series B in approximately 18 months, and any new instrument must secure Verdant's consent.
Verdant Capital's 1x non-participating preference sits ahead of the entire ordinary position — founders and angels combined — and their consent rights mean no financing structure proceeds without their agreement.
One term loan with the clearing bank: £2.45m outstanding at 7.5% fixed, three years remaining. Binding covenant is net debt to EBITDA, capped at 3.0x. Current leverage sits at 1.36x. Against £1.8m EBITDA, the covenant ceiling implies maximum net debt of £5.4m — leaving £2.95m of headroom before breach. The £4.2m capex requirement exceeds that headroom by £1.25m, making the covenant definition the central structural constraint on any debt-led solution.
£0.4m of equipment leases on the existing production line, a property lease on the factory, and standard supplier credit terms.
The clearing bank already holds the covenant and knows the business. A top-up draws on the £2.95m of existing headroom to fund the £1.6m of soft costs — fit-out, installation, commissioning and working capital ramp — which are the tranches the asset finance house cannot touch. At £1.6m drawn, the bank remains £1.35m inside its own ceiling, making this the lowest-friction component of the stack.
The £2.6m equipment tranche — deposit and balance together — is the natural asset finance target. The asset finance house has indicated comfort in principle, valuing against equipment cost on a going-concern basis rather than distressed secondary value, supported by the committed grocer contract and a functioning secondary market for moulded-fibre lines. This instrument closes the £1.25m gap that the bank covenant cannot absorb, provided operating-lease treatment holds and the facility sits outside the net debt definition.
Not yet explored, but worth testing against the asset finance house on pricing. Vendor financing on a £2.6m equipment order is plausible at this scale, particularly where the supplier has a commercial interest in placing the line. Could compete on rate with the asset finance house.
Included for completeness only — bridges the gap without immediate dilution but converts at Series B, stacking preference ahead of the ordinary position and directly conflicting with the clean cap table being protected.
Explicitly ruled out. Current climate implies flat or down-round pricing, founders would fall below control, and additional preference ahead of the ordinary position would undermine the Series B narrative.
Priced at 12–15% with warrant coverage of 5–15% of facility value — too expensive and adds cap-table complexity heading into a Series B in 18 months. Ruled out.
Inappropriate for long-dated capex. Designed for working capital cycling, not a nine-month build-out with a fifteen-month return horizon.
Stacks preference ahead of the ordinary position and conflicts with the clean cap table being protected for Series B. Ruled out despite being listed for completeness.
The term loan top-up and the sale-and-leaseback are complementary rather than competing — they address different parts of the £4.2m requirement. The bank covers the £1.6m of soft costs that have no asset backing; the asset finance house covers the £2.6m of equipment that does. Together they close the full requirement without equity dilution and without breaching the covenant ceiling, provided the operating-lease treatment holds. Supplier finance is a credible alternative to the asset finance house on the equipment tranche and is worth one conversation to benchmark on pricing and documentation simplicity. The convertible note is the fallback if the lease treatment fails — not a preferred path.
| Instrument | Fit with cash curve | Cost of capital | Strategic flexibility |
|---|---|---|---|
| Term loan top-up (clearing bank) |
Strong
Draws in staged tranches aligned to the soft-cost milestones — fit-out at month 6, commissioning at month 9. The bank is already familiar with the covenant structure and the business. The five-month gap between full drawdown and debt service cover is absorbed by the existing £1.8m EBITDA base, which the bank can model against the consolidated group position. |
Strong
Likely priced at 7.5–8.5% given the existing relationship and the incremental nature of the facility — the bank is lending against soft costs on an already-known borrower with a committed contract as demand anchor. No dilution, no warrants. Principal arrangement and legal fees are modest at this size. |
Strong
Preserves full cap table for Series B. The bank will impose standard financial covenants on the incremental facility, which means any softening in the core business during the build period creates covenant pressure — but this is manageable given current headroom. No control concessions beyond existing covenants. |
| Honest viewThe bank's willingness to extend on soft costs depends on their read of the grocer contract. A lender being asked to fund £1.6m of assets with no secondary market value will want to see the contract, the termination provisions, and the consolidated DSCR through the ramp period. This is a relationship conversation, not a credit committee slam-dunk. | |||
| Sale-and-leaseback / asset finance on new equipment |
Excellent
Directly matches the equipment drawdown profile — the £0.8m deposit at month 0 and £1.8m balance at month 3 are precisely the tranches this instrument is designed to fund. The asset finance house structures drawdowns against delivery and installation milestones, which aligns tightly with the committed supplier schedule. |
Solid
Equipment finance on specialist manufacturing kit typically prices at 7–11% depending on asset quality, contract cover, and LTV. Given the going-concern valuation basis and the committed grocer contract as demand anchor, the lower end of that range is achievable — call it 8–9%. No equity dilution, but the lease structure creates a fixed monthly obligation that sits ahead of discretionary spend through the ramp period. |
Solid
The lease obligation runs for the facility term regardless of contract performance — if the grocer exercises the termination-for-convenience clause after year one, the lease payments continue. This creates a fixed-cost floor that limits operational flexibility in a downside scenario. The asset finance house may also require a step-in right or assignment of the grocer contract as additional security. |
| Honest viewThe operating-lease treatment question is not a technicality — it is the structural foundation of this instrument's role in the stack. If the lease is written as a finance lease or if Verdant's legal team classifies it inside net debt, the gap-closing function disappears and the structure needs a fundamental redesign. The term sheet must address this before anything goes to Verdant for consent. | |||
| Supplier finance (equipment vendor credit) |
Solid
Aligns naturally with the equipment payment schedule — a vendor would typically defer the balance payment at month 3 or offer staged terms across the build period. Less certain than a dedicated asset finance house in terms of availability and structure. |
Strong
Vendor financing on a large equipment order can be competitive — sometimes below market rates where the supplier has a commercial interest in closing the sale. No arrangement fees, no warrants. The risk is that terms are not disclosed upfront and may be less flexible than a specialist lender. |
Solid
Preserves the cap table. The constraint is that vendor credit typically covers only the equipment cost and may not offer the same structured drawdown flexibility as a specialist asset finance house. It also creates a supplier dependency — if the relationship sours, the credit facility becomes a negotiating lever. |
| Honest viewWorth one conversation to benchmark against the asset finance house. If the vendor offers comparable terms with simpler documentation, it removes the operating-lease treatment risk because the instrument is structured as trade credit rather than a lease — it would not typically appear in the net debt covenant at all. | |||
| Convertible note |
Developing
Can be drawn flexibly and covers the full £1.25m gap without covenant breach. The timing mismatch is acceptable — a convertible note has no fixed repayment schedule, which reduces near-term cash pressure during the ramp. |
Developing
Typically priced at 6–8% coupon with conversion at a 15–20% discount to Series B price. The real cost is the dilution at conversion and the additional preference stacked ahead of the ordinary position — directly conflicting with the stated objective of a clean cap table for Series B. |
Developing
Forecloses the clean Series B narrative. A new investor at Series B looking at a cap table with a convertible note outstanding will price in the discount and the additional preference overhang. It also requires Verdant's consent and would likely prompt a renegotiation of their own preference terms. |
| Honest viewThis instrument only makes sense if the operating-lease treatment fails and no other non-dilutive gap-closer is available. It is the fallback structure, not a preferred option. | |||
The combination stack works because the two instruments address structurally different parts of the £4.2m requirement. The asset finance house takes the piece it can underwrite — tangible equipment with a going-concern valuation and a committed contract as demand anchor. The clearing bank takes the piece it knows — a borrower relationship, soft costs within existing covenant headroom, and a consolidated EBITDA base that services the debt through the ramp. Neither instrument alone closes the requirement; together they do, without equity dilution and without touching the cap table ahead of the Series B.
| Instrument | Amount | Role in the stack |
|---|---|---|
| Sale-and-leaseback / asset finance | £2.6m | Funds the full equipment tranche — £0.8m deposit at month 0 and £1.8m balance at month 3. Structured against the equipment asset on a going-concern valuation basis, with the committed grocer contract as demand anchor. Closes the £1.25m gap that the bank covenant cannot absorb, conditional on operating-lease treatment. |
| Term loan top-up (clearing bank) | £1.6m | Funds the £1.6m of soft costs — £1.0m fit-out and installation at month 6, £0.6m commissioning and working capital at month 9. Draws on existing covenant headroom; at £1.6m drawn the bank sits £1.35m inside the 3.0x ceiling. |
| Undrawn revolver (contingency) | Up to £0.6m — undrawn contingency | Covers the soft-cost tranche already funded by the term loan top-up. Not drawn in the base case — available as a buffer if commissioning slips or working capital requirements exceed the £0.6m month-9 estimate. |
The structure preserves the clean cap table, stays within the covenant ceiling on the bank side, and puts the specialist-asset risk with the lender best positioned to underwrite it. The grocer contract is the demand anchor that makes the non-dilutive case coherent — a speculative equipment build would not support this structure, but a committed supply obligation does.
A single term loan from the clearing bank covering the full £4.2m would breach the 3.0x covenant by £1.25m and require either a covenant amendment or a waiver. A covenant amendment would require bank consent and potentially Verdant consent, would be slower, and would leave less headroom for the Series B period. The combination stack avoids that conversation entirely.
The combination stack is the right structure for this opportunity. It matches the cash curve, closes the financing gap, preserves the cap table, and uses the grocer contract as the demand anchor that makes the non-dilutive case coherent. The structure cannot be executed until the operating-lease treatment is confirmed in writing — that is a legal due diligence step, not a financing negotiation, and it should happen before any lender conversations progress beyond indicative terms. Supplier finance on the equipment tranche is worth one conversation to benchmark against the asset finance house on pricing and documentation simplicity — if vendor credit is available at comparable terms, it removes the lease treatment risk entirely because the instrument would be structured as trade credit rather than a lease.
What this is. This Capital Structure Decision was built through a guided conversation between Demo and Ren.
How it was built. All analysis reflects your own thinking — structured using established frameworks, sharpened, and presented clearly.
This report was produced by Ren, an AI advisor built by Renatus. It is based on information you provided during the conversation and established frameworks. It is intended to support — not replace — your own judgement. All conclusions should be reviewed before acting on them.
Renatus applies the underlying principles of established methods and credits their origin where relevant. Named frameworks, methods, and instruments are the property of their respective owners. Reference to them does not imply endorsement or affiliation.
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