The cost of capital is a financial concept, which tells how expensive the capital is for you, i.e. how high is the interest rate for debt or how much equity you give away in exchange for equity financing. If you are interested in digging deeper into the topic, check other articles in our blog devoted to the topic of the cost of capital and how to reduce it.
How expensive the capital is for you basically depends on the risk of investing in your business and the potential return it may deliver. Going public dramatically reduces the potential risk of investing in your company because of two reasons:
- As now your shares are traded freely, in case an investor is unsatisfied with your performance they can simply sell their stake on the stock market. Otherwise, they could have waited long for years to exit the investment, while the losses would amplify.
- In case of problems with debt repayments, you can always raise more on a stock market or pay your debt with shares, which also reduces the risk for your lenders.
Reduced risk means lower cost of raising capital because you can have a more balanced capital structure, i.e. split fundraising between equity and debt.