We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are the Effects of High Cost of Capital?

Malcolm Tatum
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The cost of capital is term that is used to describe both the cost of debt and the cost of equity that is associated with a financial endeavor. Essentially, this means that in order for the project to be profitable and worth the resources and risk that investors assume, that project must produce at least a certain minimum of return. With a high cost of capital, this can have an effect on not only how the investors go about securing funding for the project but also how much of a return must be generated in order to make the endeavor worth the effort.

Since the high cost of capital has to do with what is needed in the way of finances to support a project, the figure will also have some influence over how those resources are generated to cover the costs. Depending on how much capital is required, the effort may call for issuing some sort of bond issue that provides the money up front to fund the project, with the expectation that it will become self-supporting and produce revenue within a certain period of time. Here, the cost of repaying the principal is only one consideration as part of the high cost of capital. It is also necessary to project the amount of interest payments that must be made to investors, as well as the costs of managing the bond issue from the date of creation all the way through to the maturity date.

Other means may be used to manage the high cost of capital, such as using a business line of credit, obtaining a business loan, or even factoring the accounts receivables of an existing business in order to secure the necessary funds now rather than later. With each solution, the effect of the high cost of capital is that those solutions may or may not be feasible, depending on the projected return of the project and the amount of expenses the borrower will incur. For this reason, accurately projecting not only the costs associated with the borrowing but also when and how much return will be realized to manage that debt is very important.

Ideally, the high cost of capital is offset by returns that cover all capital expenses and still leaves a considerable amount of profit for the investors and company owners. Since only those directly involved can decide how much profit is considered acceptable in terms of the risk and expense associated with the endeavor, it is necessary to set specific goals for those returns. If the projected returns will not cover the high cost of capital or are not likely to produce what is considered a reasonable level of profit, choosing to abandon the effort and find a different project would be worthy of consideration.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.