Simple Definition:
Cost of capital is basically the price you pay to get money to fund your business or project.
Easy Explanation:
- Imagine you need money to start or grow your business.
- If you borrow from a bank, the interest rate is your “cost of capital.”
- If you get money from investors, the returns they expect act like an “interest rate” you owe them for taking a risk on your business.
In other words, cost of capital is the minimum return your company needs to earn just to pay back whoever gave you the money—whether that’s a bank (through interest) or investors (through a share of profits or increased value). If your business doesn’t make at least this much, it’s effectively losing money on the deal.
You may also be interested in how to calculate the weighted average cost of capital and you can create financial projections with these financial model templates.
Article found in Startups.
