{"id":29684,"date":"2024-02-15T10:35:24","date_gmt":"2024-02-15T10:35:24","guid":{"rendered":"https:\/\/swoopfunding.com\/ca\/blog\/how-to-calculate-the-cost-of-debt\/"},"modified":"2024-04-16T15:27:58","modified_gmt":"2024-04-16T15:27:58","slug":"how-to-calculate-the-cost-of-debt","status":"publish","type":"blog","link":"https:\/\/swoopfunding.com\/ca\/blog\/how-to-calculate-the-cost-of-debt\/","title":{"rendered":"How to calculate the cost of debt"},"content":{"rendered":"\n

For small businesses or start-ups, securing funding is the foundation for expanding your company. <\/p>\n\n\n\n

Business loans<\/a> and lines of credit can provide the necessary capital but also come at a cost. Calculating your cost of debt helps you to figure out if taking on debt makes financial sense for your company’s situation and future goals.\u00a0<\/p>\n\n\n\n

In this guide, we\u2019ll explore how to calculate the cost of debt, why it matters to your business, and how working with a funding partner like Swoop can optimize the process.<\/p>\n\n\n\n

What is the cost of debt?<\/h2>\n\n\n\n

The cost of debt refers to the overall cost that a company pays on borrowed money. This includes loans, bonds, credit lines, or any other form of debt financing. <\/p>\n\n\n\n

The cost of debt is how much interest a company pays on borrowed money. This includes loans, bonds, credit lines, or any other form of debt financing. <\/p>\n\n\n\n

There are two ways most businesses seek new financing \u2014 through equity financing or debt equity. With equity financing, an investor will provide capital in exchange for ownership of the company (a percentage of the company\u2019s equity). <\/p>\n\n\n\n

With debt equity, a company will receive financing as a loan to be repaid over time with interest.<\/p>\n\n\n\n

For most loans, the cost of debt depends on the interest rate, closing costs or added fees, and repayment timeline. The higher the interest rate and fees, the higher the total cost of debt. <\/p>\n\n\n\n

Why does the cost of debt matter?<\/h2>\n\n\n\n

For small businesses, every dollar counts toward success or failure. Taking on some debt may provide much-needed capital to expand operations, purchase equipment, hire staff, or bridge cash flow gaps. <\/p>\n\n\n\n

However, it\u2019s important to understand how the cost of your company’s debt directly affects your profit margins. Higher interest expenses can also reduce the free cash flow available. <\/p>\n\n\n\n

Carefully evaluating the short and long-term costs of debt can enable you to make smart financial decisions aligned with your growth goals. <\/p>\n\n\n\n

Taking the time to determine potential costs accurately can help you better model financial scenarios, forecast growth opportunities against expenses, and determine breakeven points. This can give you greater confidence before deciding on funding. Register with Swoop<\/a> today to start discovering your options.<\/p>\n\n\n\n

If your calculations determine the cost of debt is too high, you can look for more affordable alternatives. This upfront analysis can protect you from entering unfavorable funding terms that hinder rather than help your business. <\/p>\n\n\n\n

Factors that affect the cost of debt<\/h3>\n\n\n\n

Several important factors determine the interest rates and fees lenders will offer: <\/p>\n\n\n\n