By Susan Guillory –
When you take out a loan (also known as debt capital), your primary focus is probably on having working capital to grow your business or steady your cash flow. But there’s something else to consider: your cost of debt.
If you’re just focusing on your loan’s monthly payment and not diving 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 — usually a venture capitalist or angel 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 an interest expense, over months or years. The term debt equity could be confusing, but is basically referring to a loan. (more…)