Maintenance capital expenditure is what a business must spend on equipment and property just to keep earning what it earns today: replacing worn vehicles, machines, computers and fixtures. Growth capex buys capacity or earnings the business does not yet have. Lenders subtract maintenance capex from EBITDA before asking what is left to pay debt, most visibly when they size the loan and in the fixed charge coverage ratio, because that cash is spoken for. Without records to show the split, many lenders treat all capex, or at least the depreciation charge, as maintenance, which lowers the debt the business can support.
- Maintenance capex
- Spending to sustain current earnings: replacement and upkeep
- Growth capex
- Spending to add capacity, locations, products or contracts
- Where lenders deduct it
- FCCR, cash-flow sizing, excess cash flow, capex covenants
- Usual proxy without records
- All capex, or the annual depreciation charge
- What proves the split
- A fixed-asset register tied to invoices and to what was replaced
The two kinds of capital spending
Capital expenditure is money spent on assets that last more than a year, so it goes on the balance sheet and is depreciated rather than expensed. That is why it does not appear in EBITDA. But the accounting treatment hides an economic difference that lenders care about a great deal.
Maintenance capex is the spending that keeps the business where it is. A trucking company that stops replacing tractors will see breakdowns, lost loads and rising repair bills within a few years. A restaurant that never replaces its kitchen equipment or refreshes its dining room will lose customers. For a lender, this spending is as unavoidable as rent: it is a cost of producing today's EBITDA that happens to be paid in lumps.
Growth capex is spending that adds something: a new location, a second production line, vans for technicians the business has not yet hired, equipment to serve a contract just won. It is discretionary. The business could stop it and still earn what it earns today.
Maintenance capex is a cost of today's earnings. Growth capex is an investment in tomorrow's. Lenders lend against today's.
How the split looks in practice
The line is easy to state and harder to draw, because much spending does both. The table gives common examples; a lender will look at the facts of each item.
| Business | Maintenance | Growth | Usually argued |
|---|---|---|---|
| Trucking company | Replacing tractors and trailers on their normal cycle | Adding tractors for a new dedicated contract | Replacing an old tractor with a newer, more efficient one |
| Restaurant group | Kitchen equipment replacement; periodic refresh of an existing site | Building out a new location | A remodel that adds seats |
| Manufacturer | Rebuilding or replacing worn machines | A new line for a new product | Replacing a machine with a larger one that adds capacity |
| HVAC or plumbing contractor | Replacing service vans at the end of their life | Vans and tools for new technicians | Fleet upgrades bundled with new hires |
| IT services company | Laptop and server refresh | Hosting capacity for a signed customer | Software development that is capitalized |
| Dental practice | Replacing chairs and imaging equipment | Fitting out an additional operatory | Upgrading to new imaging technology |
For the argued cases, the usual approach is to split the cost: the part that replaces what existed is maintenance, the part that adds capacity is growth. A replacement machine that is larger than the one it replaced is a common example. Lenders are more willing to accept a split when the growth part is tied to revenue they can see, such as a signed contract or a new location with its own results.
Where lenders subtract it
- Fixed charge coverage. The standard FCCR formula deducts unfinanced capital expenditures from EBITDA. Capex paid for with an equipment loan is excluded, because the loan's payments already appear in fixed charges. Note that many covenant definitions deduct all unfinanced capex, growth included, so the maintenance split does its main work when the loan is sized; growth spending paid from cash can still count against the covenant unless the agreement carves it out or the spending is financed. See DSCR vs FCCR.
- Cash-flow sizing. Many lenders size a term loan on cash flow after maintenance capex rather than on raw EBITDA, so the deduction flows straight into the loan amount. DSCR calculations often make the same deduction.
- The excess cash flow sweep. Capex paid in cash is usually subtracted before the lender takes its share of excess cash flow. See excess cash flow sweep.
- Capex covenants. Some agreements cap annual capital spending, often with the right to carry unused amounts forward. The cap needs to leave room for real maintenance needs.
- Valuation and acquisition price. Buyers and lenders both look at earnings after maintenance capex to judge what a business is worth. See how lenders value a business.
A worked example: what the records are worth
A regional transport company has EBITDA of 2,000 and pays 100 in cash taxes. Last year it spent 600 on equipment from its own cash. The owner says 200 of that was replacing worn trucks and 400 was adding trucks for a new customer contract. Its depreciation charge is 450. The lender sizes the loan to leave fixed charge coverage of 1.25x on cash flow after maintenance capex.
| How the lender treats capex | Capex deducted | Cash available | Most annual debt service at 1.25x |
|---|---|---|---|
| Owner's split, supported by records | 200 | 1,700 | 1,360 |
| No usable records; depreciation as a proxy | 450 | 1,450 | 1,160 |
| No usable records; all capex treated as maintenance | 600 | 1,300 | 1,040 |
The same business, with the same trucks, supports nearly a third more annual debt service when the split is documented than when it is not. That difference carries straight into the loan amount. The records do not change what the business earns; they change what a lender can prove about it.
Depreciation is the fallback because it is on every set of financial statements and roughly measures how fast the business uses up its assets. It is a blunt tool: accelerated tax depreciation can make it much higher than real replacement needs, and fully depreciated but working equipment can make it much lower. A lender that sees capex consistently below depreciation will ask whether the business is under-investing.
Deferred maintenance in an acquisition
A seller preparing a business for sale has a reason to spend less on equipment in the final years: every dollar not spent lifts cash flow and looks like higher earnings. The buyer then inherits an ageing fleet or worn machines and a catch-up bill. Lenders and quality of earnings reviewers look for this by comparing recent capex with earlier years and with depreciation, and by asking for the age and condition of major assets.
If catch-up spending is needed, it is better named in the plan and financed than discovered after closing. Some buyers fund it with equipment loans alongside the senior facility; see equipment loans alongside senior debt. In an SBA deal, equipment can be financed within the 7(a) loan, with maturities up to 10 years, or 15 if its useful life supports it. A lender that sees the catch-up in the sources and uses will size the rest of the loan with more confidence than one that finds it in the first year's results.
How to document the split
The records that make a lender accept a maintenance figure are ordinary ones. Most businesses have them in some form; they are rarely kept in a way that answers the question directly.
- A fixed-asset register listing each significant asset with its purchase date, cost, expected useful life and, for recent purchases, what it replaced.
- Invoices tagged by purpose, so each capital purchase can be traced to replacement or expansion.
- An equipment age list for fleets and machinery, showing the replacement cycle the business actually follows.
- Evidence for growth items: the contract, the new location's results, the hires the new vans were bought for.
- A capex plan for the next few years that separates the two and matches the history.
Transparent's financing model carries maintenance and growth capex as separate lines, from the records, so a lender sees the split and its support in the package rather than asking for it later. For a deeper look at how the split changes debt capacity, see maintenance vs growth capex.
Common questions
- Is maintenance capex the same as depreciation?
- No. Depreciation is an accounting charge spreading past purchases over their lives. Maintenance capex is cash actually spent on replacements. Lenders sometimes use depreciation as a proxy when a business cannot show its maintenance spending.
- Why doesn't EBITDA include capex?
- Because capital purchases are recorded as assets and depreciated, not expensed, and EBITDA adds depreciation back. That is exactly why lenders deduct maintenance capex separately.
- Do lenders deduct growth capex?
- Not when sizing the loan, if the growth spending is documented. Undocumented growth capex is often treated as maintenance. A covenant is different: many FCCR definitions deduct all unfinanced capex, so growth spending paid from cash counts against the test unless it is financed, funded with new equity or carved out in the agreement.
- Does financed capex count against coverage?
- Not twice. When equipment is bought with a loan, the purchase is excluded from the capex deduction and the loan payments appear in fixed charges instead.
- What records does a lender want?
- A fixed-asset register, invoices tied to purpose, an equipment age list and evidence for growth items, such as the contract or new location the spending served.