If your business can’t earn its cost of capital, you won’t be in business very long. But what is that cost, exactly?
The answer can be difficult to grasp depending on the financing arrangement. The cost of debt is the interest rate on the loan (if you can get one, that is), though there may a host of provisions that mess with the math (see The True Cost Of Debt”). With any luck, a bank may charge you prime plus 200 basis points, or around 5.25% currently, but it will surely ask you for a personal guarantee–a one-way ticket to bankruptcy should things go wrong. Then there are hybrid instruments, which combine characteristics of debt and equity (see “Financing For Troubled Times”).
This article originally appeared on Forbes.com.