Factors that Influence the Cost of Finance
1. Terms of reference - if short term, the cost is generally low and vice versa.
2. Economic conditions prevailing - If a company is operating under inflationary situation, such a company will pay high costs in so far like inflationary effect of finance will be passed on to the company.
3. Risk exposed to venture - if a company is operating under high risk conditions, so that a company will pay high costs to involve lenders to avail finance to it as the element of risk will be added on the cost of finance that may compound it.
4. Size of the business - A small company will find it not easy to raise finance and like will pay heavily in form of cost of finance to get debt from lenders.
5. Availability - Cost of finance or can say COF prices will also be influenced with the forces of demand and supply which low supply and low demand that will lead to high cost of finance.
6. Effects of taxation - Debt finance is cheaper with the amount equal to tax on interest and because of debt finance will entail a saving in cost of finance equivalent to tax on interest.
7. Nature of security - If protection given depreciates fast, so then this will compound implicit costs like costs of maintaining that protection.
8. Company's growth stage - Young companies generally pay less dividends whether case the cost of this finance will be relatively cheaper on the earlier stages of the company's progress.