In fairness I rarely get asked this question, but it bubbles to the surface regularly when looking at capital structures, particularly for acquisitions.
This is because buyers typically want to maximise borrowing, to save having to raise equity and dilute their shareholding. The limits on debt capacity act as break on over-loading structures, and a mix of new cash equity from the buyer, and deferred consideration from the seller, are key parts of the transaction.
Cashflow debt providers like established businesses with decent recent trading history, so that they can model future revenue, profits, and critically free cashflow – to service the debt burden being taken on.
The focus on debt service – for both commercial loans and deferred consideration, with a margin of safety, is an important mechanism for determining the right level of debt. Capital required above this level can be classified as equity risk.
Please feel free to comment or speak to me for any debt capacity enquiries.