Financing cost

The cost of financing is the cost that a financial institution charges us, as well as an economic agent, as a consequence of lending us capital. When they lend us money, this money is loaned at a certain interest rate. Thus, indebtedness ends up having a cost that we call financing cost.

In this sense, the most common financing costs are commissions and interest derived from bank loans.

Types of financing costs

There are a multitude of financing costs. However, in Economipedia we have made a list of those most common financing costs.

Among them, the following should be highlighted:

• Interest on debts.
• Interest from factoring discount.
• Expenses for dividends of shares or participations considered as financial liabilities.
• Commissions for the use of credit lines.

This relationship tries to bring together the main financing costs that usually occur in the day-to-day life of a company or an institution. However, there are more types of financing costs that could have been excluded from the relationship.

Types of financing costs depending on the time

Depending on the period of time agreed with the creditors, the financing costs can be divided into two types.

In the first place, the short-term financing costs, among which the following should be highlighted:

Short term loans

• Opening commission.
• Type of interest.
• Study commission.
• Cancellation commission.
• Interest for late payment or non-payment.
• Early repayment commission.

Credit line

• Opening commission.
• Type of interest.
• Commission for renewal.
• Commission for non-provision.
• Interest for late payment or non-payment.

Commercial discounts

• Type of interest.
• Commissions.

Commercial credit

• Type of interest.
• Commission for non-payment.

Crowdlending

• Type of interest.

Confirming

• Commission for the advance.
• Type of interest.

Factoring

• Opening commission.
• Study commission.
• Type of interest.
• Commission for management.
• Commission for imago.

For the long term, the financing costs to highlight would be:

Bank loans

• Opening commission.
• Type of interest.

Leasing

• Opening commission.
• Type of interest.
• Commission for cancellation before expiration.

Financing costs example

Among the examples that we could have selected to easily classify what a financing cost is, we have selected the following example.

Let’s imagine that we need a loan of 10,000 dollars to undertake an investment in our office. Therefore, we go to our bank branch to evaluate the loan and see if it is possible to grant it to us.

Once we are at the bank, we choose a loan option that charges us a study fee of 0.5%. This reflects an initial financing cost of $ 50.

Second, when we have selected the loan and the bank has approved our solvency, it charges us an opening commission. According to the loan we want to acquire, and since we are not clients of the bank, they charge us an opening commission of 0.25%. Therefore, we must add a new financing cost in the amount of $ 25.

Once the loan is signed, the bank tells us that we must pay an interest rate of 1.75%. This will be calculated with the installments, so we must add a new financing cost, since the loan carries that interest rate.

In addition, since we anticipate that we will receive income after the opening, we ask the bank for a possibility to repay the loan in advance. That is, we request to cancel the loan, paying the difference as soon as the income occurs. For this reason, the bank charges us 0.10%, as a commission for early repayment. In this sense, a new surcharge of 0.10% would have to be added to the financing costs, which is equivalent to 10 dollars.

Thus, as we see, the financing costs in this case would be four:

• The study commission.
• The interest rate.
• The opening commission.
• The cancellation commission.