Daily Observation - True Cost of Capital

Today's observation came to me while reading a book about Capital. It is very apparent that most people borrowers, as well as lenders are not aware of the true cost of capital for a transaction. Capital can be both physical, the stuff we buy things with, or intellectual capital, that knowledge we have to acquire things with. In the long run intellectual capital may be the more expensive of the two, but more about that on another blog.

Let's focus in on the money aspect of the cost of capital.

Capital providers, whether they are banks, asset-based lenders, mezzanine lenders. or private equity funds, neither post prices for their capital nor typically announce the characteristics the borrowers must possess to access their money.

Although, its not disclosed, every capital source has a "credit box" which describes the criteria necessary access their funds. For example, most banks are cash flow talkers but in actuality are collateral lenders.

Credit providers expect to receive certain returns for their capital. These rate of returns consider all of the terms for the investment such as origination costs, compensating balances and monitoring fees. Once a business owner knows the full cost they then can compare different investments and their returns. All of the above are based on Return on Investment.