A sources and uses table is a two-column summary of a financing. Uses list everything the money must pay for at closing: the purchase price or debt being refinanced, fees and closing costs, working capital and any reserves. Sources list where each dollar comes from: senior debt, a line of credit, seller financing, rollover equity and the buyer's or owner's cash. The two totals must be equal. Lenders read it first because in a few lines it shows the size of the deal, how much of it is debt, who has cash at risk, and whether anything has been left out.
- What it shows
- Every dollar needed at closing, and every dollar that pays for it
- The one rule
- Total sources equal total uses, to the dollar
- Used in
- Acquisitions, refinancings, recapitalizations, real estate and equipment purchases
- What a lender reads from it
- Deal size, debt share, cash equity, fees, and what lands on the balance sheet
- What it feeds
- The financing model: opening debt, cash and equity all start here
- Most common error
- Leaving out fees, closing costs or the working capital the business needs on day one
Two columns, one total
The table has a simple shape. On the left, or on top, are the uses: what the money is spent on at the moment the deal closes. On the right, or below, are the sources: where each dollar comes from. Each line usually also shows its share of the total, so a reader can see at once, for example, how much of the deal is senior debt and how much is cash equity.
The two totals have to match exactly. That is not bookkeeping pedantry. A deal where sources exceed uses has cash left over with no stated purpose, which a lender will ask about. A deal where uses exceed sources has a hole, and holes are filled at the last minute with the most expensive money available: a bigger seller note, a second lien, or equity the buyer does not have.
Sources and uses is a snapshot of one moment, the closing. It is not a forecast, and it does not show how the debt will be repaid. That is the job of the financing model behind it. But every number in the model starts here: the opening debt balances, the opening cash, and the equity the owners have put in.
What goes in each column
| Line | Column | What it covers |
|---|---|---|
| Purchase price | Use | The price in the purchase agreement, after agreed adjustments, including any escrowed portion |
| Debt refinanced | Use | Existing loans paid off at closing, including accrued interest and any prepayment charges |
| Working capital or cash to the balance sheet | Use | Cash the business needs on day one to pay suppliers and payroll before receivables come in |
| Fees and closing costs | Use | Lender fees, legal, appraisal, quality of earnings, environmental, title |
| Reserves | Use | Interest, capital expenditure or other reserves a lender requires to be funded at closing |
| Senior term loan | Source | The main loan: a bank or private credit term loan, or a unitranche |
| Line of credit drawn at closing | Source | Any amount borrowed on a revolver on day one, as distinct from the unused commitment |
| Seller note | Source | The part of the price the seller is paid over time rather than at closing |
| Rollover equity | Source | The seller's retained stake, which pays part of the price without cash |
| Buyer or owner cash equity | Source | Cash from the buyer, its investors or the company's own balance sheet |
Two sources on that list are not cash. A seller note and rollover equity both pay part of the price without any money changing hands. They belong in the table because they are part of how the price is paid, but a lender reading it separates them from the cash sources, because only cash actually reaches the seller or the business at closing.
Four deals, four shapes
The table is most associated with acquisitions, where it is covered line by line in sources and uses for an acquisition. But every financing has one, and its shape tells a lender what kind of deal it is looking at.
- Acquisition. Uses are dominated by the price. Sources are a stack of senior debt, seller financing and equity. The lender checks that the buyer has real cash in, and that fees and working capital are funded.
- Refinancing. Uses are the payoffs of existing debt plus fees and any prepayment premiums. Sources are the new loan and sometimes company cash. The table sits beside a before-and-after comparison of payments and covenants. See the business debt schedule, which the payoff lines come from.
- Growth capital. Uses are the project: a new facility, equipment, an add-on acquisition or the working capital for a large contract. Sources are often a delayed-draw term loan, a line of credit and company cash, and the table shows what is drawn at closing against what is committed for later.
- Recapitalization. Uses may include a distribution to owners or the buyout of a partner, alongside debt refinanced. That line matters: the lender reads it against the equity left beneath its loan once the distribution is paid. See recapitalizations.
An acquisition, balanced
Take a buyer acquiring a company with EBITDA of 5,000 for a price of 24,000. The business needs 500 of cash on its balance sheet at closing, and fees and closing costs come to 700. Total uses are 25,200.
| Uses | Amount | Sources | Amount |
|---|---|---|---|
| Purchase price | 24,000 | Senior term loan | 15,000 |
| Cash to the balance sheet | 500 | Revolver drawn at closing | 500 |
| Fees and closing costs | 700 | Seller note, subordinated | 2,500 |
| Seller rollover equity | 2,000 | ||
| Buyer cash equity | 5,200 | ||
| Total | 25,200 | Total | 25,200 |
The lender reads it in seconds. Senior debt is 15,500 against EBITDA of 5,000, a little over three times, inside the range senior cash-flow lenders to lower-middle-market companies commonly lend, 2x to 3.5x EBITDA. Total debt including the seller note is 18,000, which the senior lender tests through a total leverage or coverage covenant, because the note's payments come from the same cash. Equity beneath the debt is 7,200, of which 5,200 is the buyer's cash. The rollover pays part of the price without cash and is counted as equity only if it carries no put or guaranteed payout.
Every omitted fee is a hole found later, and late holes are filled with the most expensive money available.
How a lender reads it
An experienced underwriter takes a handful of questions to the table before opening anything else:
- How much is debt, and against what earnings? Senior debt set against EBITDA gives leverage. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and the table shows quickly whether the request is inside that range. See senior leverage.
- How much cash has the buyer put at risk? Equity that is cash, as opposed to notes and rollover, is what the lender takes most comfort from.
- Are the fees in? A table without fees is a table that will change.
- Does the business have enough cash on day one? In a debt-free, cash-free deal the seller keeps the cash, so opening cash has to be funded as a use. See working capital at close.
- Does it tie to everything else? The price should match the purchase agreement, the payoffs should match the payoff letters, and the debt lines should match the term sheet.
Sources and uses, funds flow and the pro forma balance sheet
Three documents describe the closing, and they are often confused. Sources and uses is the summary: categories and totals, prepared early and revised as the deal firms up. The funds flow memorandum is its operational twin, prepared in the last days before closing: every wire, to every account, with the payoff amounts per day from each payoff letter and the escrow deposits. The pro forma balance sheet shows the company the morning after: its new debt, its new equity and its opening cash.
The three must agree. If the funds flow shows a wire the sources and uses did not anticipate, the lender will ask why, and a late surprise at that stage can delay the closing. This is why the table belongs at the front of the package from the first draft, as the page every other schedule in the financing model draws from. Once a borrower's documents are in, Midas Partners builds the full lender package, financing model included, in a day.
Common questions
- Why must sources equal uses exactly?
- Because the table describes the same money twice: once by where it comes from and once by where it goes. If the totals differ, either a use is missing, which leaves a funding gap, or a source has no purpose, which a lender will ask about.
- Does the escrowed part of the price appear separately?
- Usually it sits inside the purchase price, since it is price paid into escrow rather than a new use. Some tables show it as a sub-line for clarity. It does not reduce what the sources must fund. See indemnity escrow and holdback.
- Is a seller note a source even though no cash moves?
- Yes. It pays part of the price, so it belongs in sources. Lenders separate it from cash sources when judging how much the buyer has at risk, and count its payments in coverage.
- Should fees be financed or paid in cash?
- It depends on the lender. Many lenders will finance closing costs within the loan. Either way they must appear as a use, because they are paid at closing.
- What is the difference between sources and uses and a funds flow?
- Sources and uses is the summary by category, prepared from the first draft of the deal. The funds flow is the list of actual wires at closing, with account details and exact payoff amounts. The funds flow must reconcile to the sources and uses.