Leverage is one of those concepts that sounds simple until it isn't. Used correctly, it's how ordinary operators build extraordinary balance sheets. Used incorrectly, it's how otherwise solid businesses get walked into lender control at the worst possible moment.

After twenty years sitting at the table on commercial real estate deals, capital raises, and operational turnarounds, we've seen both outcomes enough times to have opinions.

The Three Cases Where Leverage Works

1. When Cash Flow Coverage Is Clear and Sustainable

The math has to work at current revenue, not projected revenue. We see deals structured around forecasts all the time. Some of them work out. The ones that don't tend to have one thing in common: the borrower needed the deal to work in order to afford the debt service.

Never underwrite leverage against future cash flow you don't control.

2. When the Asset Has Collateral Value Independent of Operations

Commercial real estate is the canonical example. The land and structure have value regardless of whether the tenant stays. When the collateral can stand on its own, leverage is a tool. When the only collateral is customer relationships or proprietary processes, leverage is a bet.

3. When Exit Options Are Real, Not Theoretical

Leverage works when you can see the exit. A refinance in 18 months when rates drop. A strategic buyer who's expressed interest. An IPO pipeline that's actually moving. When those exits are hypothetical, the leverage is too.

The Three Cases Where Leverage Destroys Value

1. During Operational Transitions

Changing management, integrating an acquisition, pivoting a business model — these all compress margin temporarily. If you're leveraged during the transition, you're betting your operational runway on execution hitting plan. It almost never does.

We've watched more than one business walk into a lender workout during an acquisition integration that would have been fine if they'd had six more months of breathing room. The leverage didn't cause the problem. It made the margin for error disappear.

2. In Businesses With Customer Concentration Above 20%

If one customer represents 20% or more of your revenue, your leverage profile looks very different to a lender than your EBITDA suggests. A single contract non-renewal can cut coverage ratios in half overnight.

Lenders know this. Good ones adjust their offer accordingly. When they don't — when the terms seem too good given your concentration — that's a signal, not a gift.

3. When the Cap Rate Trap Is in Play

This one is specific to real estate, and it kills deals every cycle. The cap rate trap works like this: you underwrite a property at current cap rates, use leverage to make the returns work, and then rates move. The cap rate expands. Your refi is at a higher rate than your debt service can support at the new valuation.

We watched clients get caught in this in 2022 and 2023. They weren't doing anything wrong by the standards of 2020. The leverage was appropriate for the environment they raised it in. The environment changed.

The Principle We Keep Coming Back To

Leverage amplifies outcomes. Good leverage amplifies good outcomes. Bad leverage amplifies bad ones. The underwriting error isn't usually in the math — it's in the assumptions underneath the math.

Test your deal at 80% of projected revenue. Test it if your largest customer leaves. Test it if rates move 200 basis points against you. If it still works, leverage is your friend. If it doesn't, you're not buying a return. You're buying risk.

We've been in the room when the deal turns. If you're structuring capital right now and want a second set of eyes on the assumptions, that's exactly what we do.