Due to COVID-19, many small businesses, including sign shops, have had to take out loans to stay afloat. Loans can help owners to have working capital to grow their business or to steady their cash flow. That loan is also known as debt capital, and in addition to considering how those funds can benefit your business, you must also consider your cost of debt.
If you’re only focusing on your loan’s monthly payment and not diving in deeper to analyze the true cost you’re paying, you might be spending more than necessary on your debt financing.
What is Cost of Debt?
There are two types of capital a business can use—equity financing and debt equity. With equity financing, an investor provides working capital in exchange for a percentage of equity or ownership in the company.
With debt equity, a company takes out financing, which could be an SBA loan, merchant cash advance, invoice financing, or any other type of financing. The loan is repaid, along with interest, over months or years. The term debt equity is basically referring to a loan.
In simplified terms, cost of debt (or debt cost) is the interest expense you pay on any and all loans your business has taken out. If you have more than one loan, you’d add up the interest rate for each to determine your company’s cost for the debt.
Susan Guillory, a senior content writer over at Nav, a provider of business financing, has broken down just how to calculate your cost of debt, including helpful examples. Guillory also covers how to lower your cost of debt and the difference between APR versus cost of debt.
To learn more about cost of debt, read the full blog post on Nav’s web site.