Lenders separate the two because they answer different questions. Maintenance capex is the spending needed to keep today's earnings coming in, so a lender subtracts it from cash flow before asking what is left to pay debt. Growth capex buys earnings the business does not have yet, so a lender will often leave it out of the coverage test if it is documented and funded some other way: by equity, a capex facility or equipment financing. A credible split, backed by records, can raise the amount of debt a business supports.
- Maintenance capex
- Replaces or keeps up assets that produce today's earnings; deducted from cash flow
- Growth capex
- Adds capacity, locations or products; often excluded if funded separately
- Where it bites
- The fixed charge coverage ratio and free cash flow, not EBITDA itself
- Financed capex
- Usually excluded from the deduction, because its payments are already in debt service
- What proves the split
- A project-by-project capex schedule tied to the fixed asset register
EBITDA looks the same either way. Cash flow does not.
EBITDA is earnings before depreciation, so it ignores what the business spends on equipment, vehicles, buildings and systems. A trucking company that must replace a fifth of its fleet every year and a software firm that buys a few laptops can show the same EBITDA and have very different amounts of cash left to pay a lender. That is why cash-flow lenders do not stop at EBITDA. They take capex out before they ask how much debt the business can service.
The question is which capex to take out. If a lender deducts every dollar the business spent last year on fixed assets, it treats a new production line or a second location as if it were as unavoidable as replacing a worn-out compressor. The business ends up sized on the cash it would have if it stopped growing and still paid for the growth. Separating the two fixes that: maintenance comes out because the business cannot skip it, and growth may stay out of the calculation because the owners chose it and could stop.
Lenders are not being generous when they do this. They are measuring what they actually rely on: the cash the existing business throws off after keeping itself in working order. The maintenance capex figure is the one that tells them that.
Where the split enters the math
The split matters most in the fixed charge coverage ratio, the covenant most senior cash-flow lenders test. The common form is EBITDA, less unfinanced capital expenditures, less cash taxes (and often distributions), divided by fixed charges: cash interest plus scheduled principal. Some definitions add rent to both sides. A plain debt service coverage ratio may or may not deduct capex, depending on the lender; the difference between DSCR and FCCR is often exactly this line.
Two words in that definition carry a lot of weight. Unfinanced means capex paid out of the company's own cash. Capex paid with an equipment loan or a capital lease is usually excluded, because the loan's payments already appear in fixed charges, and deducting both would count the same machine twice. Growth capex, where the agreement recognizes it, is usually excluded only when it is funded from a source other than operating cash flow, such as new equity or a dedicated facility.
| Kind of spending | Typical treatment in coverage | Why |
|---|---|---|
| Maintenance capex paid from cash | Deducted | The business must spend it to keep today's earnings |
| Maintenance capex financed with an equipment loan or lease | Usually not deducted; the payments sit in fixed charges | Deducting both would count the asset twice |
| Growth capex funded with new equity | Commonly excluded | The cash did not come from the earnings the lender relies on |
| Growth capex funded from operating cash | Often deducted anyway, unless the agreement says otherwise | The cash left the business whatever the purpose |
| Growth capex funded by a capex or delayed-draw facility | Excluded; the new debt service is counted instead | Same logic as financed maintenance capex |
| Deferred maintenance caught up after closing | Usually treated as maintenance, sometimes reserved for at closing | It is the cost of the earnings the seller already reported |
A worked example: how the split changes debt capacity
Take a business with EBITDA of 2,000. Last year it spent 600 on capital projects: 200 replacing equipment at the end of its useful life, and 400 on a new line that added capacity for a signed customer contract. Cash taxes were 150. Its lender wants cash flow to cover fixed charges at least 1.25 times, the level conventional bank lenders commonly look for in debt service coverage.
| All capex deducted | Only maintenance deducted | |
|---|---|---|
| EBITDA | 2,000 | 2,000 |
| Less capex deducted | 600 | 200 |
| Less cash taxes | 150 | 150 |
| Cash available for fixed charges | 1,250 | 1,650 |
| Fixed charges supported at 1.25x | 1,000 | 1,320 |
Nothing about the business changed between the two columns. What changed is whether the lender believes the 400 was a one-time investment rather than a recurring cost. In the second column the business can carry about a third more annual debt service. On a term loan, that difference in debt service translates directly into a larger loan at the same rate and amortization.
The example also shows the risk. If the owner's growth line turns out to be a replacement the business needed anyway, the first column is the truth, and a loan sized on the second will be tight from its first test date. Lenders know this, which is why they push hard on the evidence. The same logic sits behind every sizing exercise on how much debt a business can carry.
How lenders decide what is maintenance
No accounting standard labels capex as maintenance or growth. The split is a judgement, and lenders form it from several sources at once:
- Depreciation as a floor. Many lenders treat annual depreciation as a rough minimum for maintenance capex, on the logic that assets wear out about as fast as the books say. An owner claiming maintenance well below depreciation needs a reason, such as a recently renewed fleet.
- The multi-year history. Three to five years of capex by category shows what the business spends in an ordinary year. A single low year before a sale or refinancing reads as deferred maintenance, and a lender will size on the multi-year figure instead.
- The fixed asset register. Age and remaining life of the major assets tell a lender what is coming due. A plant full of equipment near the end of its life has a maintenance bill that last year's figure does not show.
- What the spending produced. Growth capex should be traceable to new revenue: a new location with its own sales, added capacity tied to a contract, a new service line. If revenue did not move, the lender will call it maintenance.
- Diligence reports. In acquisitions, a quality of earnings report often includes a capex analysis, and equipment appraisals give the lender an outside view of asset condition.
Owners tend to call too much of their spending growth. A new truck that replaces an old one is maintenance, even if the new truck is bigger. A remodel that a franchisor requires to keep the franchise is maintenance. A software upgrade forced by a vendor ending support is maintenance. Lenders apply these tests line by line, and a schedule that has already applied them honestly is far more persuasive than one they have to take apart.
Capex baskets in the credit agreement
Separately from coverage, many credit agreements limit how much the borrower may spend on capex at all. The limit is a negative covenant, usually stated as a fixed annual amount, and it exists so that cash the lender expected to see paying down debt does not disappear into projects. The details of that basket decide how much room a growing business actually has.
| Feature | What it does | What to ask for |
|---|---|---|
| Annual capex cap | Limits total capex in each fiscal year | A cap sized to the capex plan in the model, with room above it |
| Carry-forward | Unused capacity in one year can be spent in the next | Carry-forward of the unused amount, not a small fraction of it |
| Carry-back or pull-forward | Lets next year's allowance be used early | Useful when a project's timing is uncertain |
| Equity-funded exclusion | Capex paid with new equity does not count toward the cap | Written to include equity contributed after closing |
| Financed capex | Capex paid with permitted equipment debt may sit outside the cap or inside a separate debt basket | A permitted equipment financing basket large enough for the fleet or machinery plan |
| Acquisitions | Buying a business is usually handled by a separate permitted acquisitions clause | Make sure add-on acquisitions are not squeezed into the capex cap |
Financed capex usually runs through a separate permitted-debt basket, and that basket needs to be sized with the same care. Companies that finance vehicles or machinery as they go should read how equipment financing sits alongside a senior facility before they sign, and should ask whether a delayed draw term loan is a better way to fund a planned expansion than operating cash.
A capex cap that matches last year's spending, with no carry-forward, turns a growth plan into a covenant default.
How to document the split before a lender asks
The businesses that get credit for their growth capex are the ones that hand the lender the analysis instead of letting the lender build it. That means:
- A capex schedule for each of the last three years and the forecast period, project by project, each tagged maintenance or growth with a one-line reason.
- A tie-out from that schedule to the fixed asset register and the cash flow statement, so the totals match the financial statements.
- For each growth project, the revenue or margin it produced or is expected to produce, and what the business would look like without it.
- An honest maintenance figure for the forecast, compared with depreciation, with an explanation where the two differ.
- How each future project will be funded: cash, equity, an equipment loan or a facility.
- Any maintenance that was deferred, stated plainly. A lender that finds it on its own will assume there is more.
When Transparent prepares a lender package, this schedule goes into the financing model and the underwriting memo, and the coverage is shown both ways so the lender sees the maintenance-only case and the all-capex case side by side. It is one of the places where how we underwrite tends to change the answer, particularly in equipment-heavy businesses such as trucking, manufacturing and construction.
Common questions
- Is depreciation the same as maintenance capex?
- No. Depreciation spreads the cost of past purchases over their useful lives; maintenance capex is the cash the business must spend now to keep its assets working. Lenders often use depreciation as a reasonableness check or a floor, but the real figure comes from the asset history and what is coming due.
- Does the lender count capex paid with an equipment loan?
- Usually not as capex. Most fixed charge definitions deduct only unfinanced capex, because the equipment loan's payments are already in fixed charges. Check the definition in your term sheet: a lender that deducts financed capex and its debt service is counting the same asset twice.
- We underspent on capex last year. Will that help our numbers?
- It helps the reported cash flow for that year, and experienced lenders discount it. They look at the multi-year average, depreciation and asset age. A single low year before a financing reads as deferred maintenance, and in an acquisition the lender may size the loan on a higher normalized figure or require a capex reserve.
- Can growth capex funded from operating cash be excluded?
- Sometimes, but it is harder. Many agreements exclude growth capex only when it is funded with equity or new debt. If your plan is to fund growth from cash flow, negotiate that into the definition and the capex basket at term sheet stage, and expect the lender to want the projects identified.
- Do SBA lenders separate maintenance and growth capex?
- SBA lenders size loans on debt service coverage, and SBA requires at least 1.15x (1.25x on historical results for a change of ownership from 1 October 2026). Many SBA lenders look at capex needs as part of that analysis, particularly in equipment-heavy industries, so the same documentation helps, even if the loan agreement does not carry a capex basket.