Use our cost of debt calculator to take the headache out of calculating your after-tax cost of debt.
Cost of Debt Calculator
What is Cost of Debt?
As a business owner, your cost of debt directly impacts your bottom line. The cost of debt is the real price you pay for your business loans, lines of credit, and bonds after factoring in interest rates and tax benefits. Understanding your after-tax cost of debt is important because it helps you make smarter financing decisions for your company’s growth.
In fact, after-tax cost of debt is simpler than it sounds. When companies borrow money, they don’t actually pay the full interest rate thanks to tax benefits. Since interest payments are tax-deductible, the real cost of borrowing is lower than the stated rate.
Think of it this way: if you take out a loan at 6% interest and your company pays the standard U.S. corporate tax rate of 21%, you’re really only paying 4.74% after tax benefits. That’s because you can deduct those interest payments from your taxable income, saving money on taxes.
This matters for real business decisions. If you’re looking at a project that’ll return 5%, it might seem like a money-loser compared to your 6% loan rate. But since you’re actually paying just 4.74% after tax benefits, that project could be profitable. Smart companies use this understanding to make better choices about funding growth and choosing between different financing options. It’s like getting a discount on borrowed money – you just need to know how to calculate it.
How is Cost of Debt Calculated
Although the cost of debt calculator above is designed to help making the cost odf debt calculation easy, every business owner should understand the cost of debt formula. It’s not just accounting jargon — it’s a powerful tool for making smart financing decisions. The basic cost of debt equation looks like this:
After-tax Cost of Debt = Interest Rate × (1 – Tax Rate)
Learning how to calculate cost of debt for your business is straightforward. Let’s say your company has a business loan at 6% interest, and your corporate tax rate is 25%. Your calculation would be:
6% × (1 – 0.25) = 4.5%
This means your business is actually paying 4.5% for that loan after tax benefits, not 6%.
How to Interpret and Apply Cost of Debt Calculator Results
Your after-tax cost of debt should inform major financial decisions. Use it to:
- Evaluate whether to take that expansion loan or lease new equipment
- Compare different bank offers for business financing
- Determine if refinancing your existing business debt makes sense
- Plan your company’s growth strategy with accurate borrowing costs in mind
- Make informed decisions about taking on additional debt to fund new opportunities
How Do Cost of Debt and Cost of Equity Affect Each Other?
Taking on too much business debt can make investors and potential shareholders wary, potentially increasing your cost of equity if you decide to sell shares or bring in investors later.
However, some debt can be beneficial for your business growth. The tax deductions from interest payments can lower your overall capital costs, making debt an attractive financing option. The key is finding the sweet spot — enough debt to benefit from tax advantages and fuel growth, but not so much that it strains your business’s cash flow or scares away potential investors.
Remember: Your goal is to fund your business’s growth while keeping your overall financing costs as low as possible. A clear understanding of your cost of debt helps you strike that balance and make financing decisions that set your business up for long-term success.