The financial costs are those that come from the remuneration to third parties for the use of external resources.
In other words, they are the costs that derive from contracting financial products or services such as loans or credits, among others.
Financial costs formula
These costs are used so that the company can carry out its activity without any damage in terms of liquidity or economic capacity.
To easily calculate the financial cost we could perform the following calculation:
It may be the case that a company needs an urgent payment to suppliers, that it needs machinery or that it simply needs a specific source of financing, that is where this type of capture of external resources comes in. The use of these resources has a cost, which can be in the form of interest, commissions or service payments.
Examples of financial costs
If we focus on the most common financial costs, some examples that we could mention are:
- Bank loan. They would grant us a sum of money that would then have to be returned in a series of installments as requested capital plus interest generated. The total of these interests would be the total financial cost in this operation.
- Credit line. In this case, they would grant us a credit account in which we could have some money that we must later return at the end of the year or the economic cycle, in order to be able to use it again the following year. Here the cost resides in the commissions generated by the disposition of the money throughout the period.
- Financial intermediation services. The cost of this service is a fixed price that is agreed upon prior to its execution. A common example is usually the hiring of financial agents to obtain mortgage loans in exchange for a certain fee. These fees would be part of the financial cost.
These are some of the examples that exist that have financial costs, but the list is much broader, we could expose from promissory notes, to renting operations, confirming , bills of exchange, etc.
Financial costs case study
Taking it to a practical case, if we hire a financial agent with whom we have agreed a fee of € 1,000 to negotiate for us to obtain a bank loan of € 10,000, which we must repay with a monthly fee over a period of 24 months of € 600, and that we also have to pay € 100 as a commission for its concession:
What we have done is multiply by 24 times the monthly payment to calculate the total amount to be returned, which includes capital and interest. Then we subtract the capital that we have requested and thus we find out the total interest that we are paying throughout those 2 years. In addition, we must add to these interests the commissions that arise and the fees that we must pay if they are contracted.