Cost of Borrowing
The cost of borrowing, or the cost of debt, is the expense a company incurs when it borrows money or finances capital to invest in the business. This includes all the costs related to obtaining funds, such as interest payments, and fees. Knowing the cost of borrowing helps borrowers compare different financing offers and ultimately decide if raising debt will benefit the business.
Pretax Cost of Borrowing (Debt) = (Interest Payments + Fees) ÷ Loan Amount
Because interest payments are usually tax-deductible, you may prefer to calculate the effective cost, minus taxes:
Post-tax Cost of Borrowing (Debt) = (Interest Payments + Fees) ÷ Loan Amount × (1 − Tax Rate)
Example:
Suppose you take out a $100,000 loan at an interest rate of 19% for one year. The total cost of borrowing is:
Interest payment = $100,000 × 19% = $19,000.
If your business is in a 30% tax bracket, the tax-deductible interest reduces your effective cost of borrowing:
After-tax cost of borrowing = $19,000 × (1 - 0.30) = $13,300.
Financial Glossary
Use Lighter Capital's glossary to understand common terms used in finance and investing, so you can build financial literacy and make informed decisions for your startup.
Cost of Borrowing
The cost of borrowing, or the cost of debt, is the expense a company incurs when it borrows money or finances capital to invest in the business. This includes all the costs related to obtaining funds, such as interest payments, and fees. Knowing the cost of borrowing helps borrowers compare different financing offers and ultimately decide if raising debt will benefit the business.
Pretax Cost of Borrowing (Debt) = (Interest Payments + Fees) ÷ Loan Amount
Because interest payments are usually tax-deductible, you may prefer to calculate the effective cost, minus taxes:
Post-tax Cost of Borrowing (Debt) = (Interest Payments + Fees) ÷ Loan Amount × (1 − Tax Rate)
Example:
Suppose you take out a $100,000 loan at an interest rate of 19% for one year. The total cost of borrowing is:
Interest payment = $100,000 × 19% = $19,000.
If your business is in a 30% tax bracket, the tax-deductible interest reduces your effective cost of borrowing:
After-tax cost of borrowing = $19,000 × (1 - 0.30) = $13,300.
For more than a decade, Lighter Capital has invested in helping early-stage tech startups succeed on their terms. Explore our small-but-mighty (and always expanding) library of founder resources to level-up your financial IQ, fine-tune your growth strategies, and lead your startup towards a lucrative exit.
Explore More Financial Resources In Our Founders' Hub
“When the time was right for us to make a move in the market, Lighter Capital was an easy way for us to get the growth funding we needed without diluting our control. Working with Lighter Capital has been a great experience.”
Mark Bania, Contractor Compliance CEO & Co-Founder
Why Choose Lighter Capital?
Lighter Capital is the largest provider of non-dilutive debt capital to start ups. Over the past decade, we’ve invested hundreds of millions of dollars into growth companies.
500+ Companies Funded
$350M+ Invested
1,000+ Rounds of Funding
100+ Startup Community Members
Get Capital to Grow. Keep Your Equity.
Lighter Capital's non-dilutive financing provides startups with a quick upfront injection of growth capital based on the business's recurring revenue streams. That means you get to keep your equity and control of the business, and your loan payments are right-sized to what the business can support. Our financing also scales with you as you grow. Apply online to find out how much you may qualify for.
