Basic Cost of Funds Calculator
This tool calculates the basic cost of funds as a percentage, based on the total expenses incurred to acquire funds and the total amount of funds secured over a period.
Enter the Total Funding Cost and the Total Funds Secured for the same period to find the Cost of Funds Rate.
Enter Funding Details
Understanding Cost of Funds
The cost of funds represents the expenses incurred by a financial institution (like a bank) or a company to obtain money that is then used for lending or investment activities. It's a key metric in finance, showing how efficiently an entity acquires the capital it needs.
The most basic calculation is:
Cost of Funds Rate = (Total Funding Cost / Total Funds Secured) * 100%
Where:
- Total Funding Cost: Includes interest payments on deposits, borrowed funds, fees, and other direct expenses related to acquiring capital over a specific period (e.g., a year).
- Total Funds Secured: The total amount of funds obtained or the average balance of funds held during that same period.
A lower cost of funds is generally better, as it means the entity can potentially lend or invest at a lower rate while still making a profit margin.
Cost of Funds Examples
Click on an example to see the calculation:
Example 1: Simple Bank Deposit Cost
Scenario: A small local bank pays out $5,000 in interest on customer deposits over a month. Their average total deposit balance for that month was $1,000,000.
1. Known Values: Total Funding Cost = $5,000, Total Funds Secured = $1,000,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($5,000 / $1,000,000) * 100% = 0.005 * 100% = 0.5%.
4. Result: The monthly cost of funds from these deposits is 0.5%.
Note: This is a monthly rate. To get an annual rate, you'd need to consider the annual cost and annual average balance, or annualize this rate (often more complex than just multiplying by 12).
Example 2: Company Borrowing Cost
Scenario: A company takes out a one-year loan of $500,000 and pays $30,000 in interest and fees over the year.
1. Known Values: Total Funding Cost = $30,000, Total Funds Secured = $500,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($30,000 / $500,000) * 100% = 0.06 * 100% = 6%.
4. Result: The annual cost of funds for this loan is 6%.
Example 3: High-Cost Short-Term Funds
Scenario: A firm needs $10,000 quickly for 3 months and uses a factoring service that costs $800 in fees.
1. Known Values: Total Funding Cost = $800, Total Funds Secured = $10,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($800 / $10,000) * 100% = 0.08 * 100% = 8%.
4. Result: The cost of funds for this 3-month period is 8%.
Note: Short-term, high-cost funding can have a very high annualized rate if calculated appropriately over a year.
Example 4: Multiple Funding Sources (Simplified)
Scenario: Over a quarter, a company paid $15,000 in interest on a total average debt of $300,000 and $5,000 in dividends on total average equity of $200,000. (Note: Cost of equity is complex, this is a simplification for demonstration).
1. Known Values: Total Funding Cost = $15,000 (debt) + $5,000 (equity) = $20,000. Total Funds Secured = $300,000 (debt) + $200,000 (equity) = $500,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($20,000 / $500,000) * 100% = 0.04 * 100% = 4%.
4. Result: The simplified total cost of funds for the quarter is 4%.
Example 5: Near Zero Cost
Scenario: A non-profit receives a zero-interest grant of $50,000. There were $100 in administrative fees to receive it.
1. Known Values: Total Funding Cost = $100, Total Funds Secured = $50,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($100 / $50,000) * 100% = 0.002 * 100% = 0.2%.
4. Result: The cost of funds for this grant is 0.2% (due to administrative fees).
Example 6: Business Line of Credit
Scenario: A business uses an average of $75,000 on their line of credit for a year. Total interest and fees paid on the line of credit for the year were $4,500.
1. Known Values: Total Funding Cost = $4,500, Total Funds Secured = $75,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($4,500 / $75,000) * 100% = 0.06 * 100% = 6%.
4. Result: The annual cost of funds for the line of credit usage is 6%.
Example 7: Issuing Corporate Bonds
Scenario: A large corporation issues bonds raising $100,000,000. Annual interest payments are $4,000,000, and annual amortized issuance costs (fees, etc.) are $200,000.
1. Known Values: Total Funding Cost = $4,000,000 + $200,000 = $4,200,000. Total Funds Secured = $100,000,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($4,200,000 / $100,000,000) * 100% = 0.042 * 100% = 4.2%.
4. Result: The annual cost of funds for these bonds is 4.2%.
Example 8: Zero Cost Example
Scenario: A company receives an upfront payment of $20,000 from a customer with no associated fees or interest costs.
1. Known Values: Total Funding Cost = $0, Total Funds Secured = $20,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($0 / $20,000) * 100% = 0 * 100% = 0%.
4. Result: The cost of funds in this scenario is 0%.
Example 9: Small Business Loan
Scenario: A small business takes out a $25,000 loan. Over a year, they pay $1,800 in interest and $100 in annual fees.
1. Known Values: Total Funding Cost = $1,800 + $100 = $1,900. Total Funds Secured = $25,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($1,900 / $25,000) * 100% = 0.076 * 100% = 7.6%.
4. Result: The annual cost of funds for this loan is 7.6%.
Example 10: Peer-to-Peer Lending
Scenario: An individual borrows $5,000 through a peer-to-peer platform. Over the term (say, 1 year), they pay $400 in interest and $50 in platform fees.
1. Known Values: Total Funding Cost = $400 + $50 = $450. Total Funds Secured = $5,000.
2. Formula: Rate = (Cost / Secured) * 100%
3. Calculation: Rate = ($450 / $5,000) * 100% = 0.09 * 100% = 9%.
4. Result: The annual cost of funds for this peer-to-peer loan is 9%.
Frequently Asked Questions about Cost of Funds
1. What is the basic definition of Cost of Funds?
It's the interest and other expenses paid by a financial entity or company to acquire and maintain the money they use for their operations, lending, or investments.
2. What does "Total Funding Cost" include?
It typically includes interest paid on deposits, interest paid on borrowed money (like loans, bonds), and any associated fees or direct expenses related to obtaining that capital over a specific time period.
3. What does "Total Funds Secured" refer to?
This is the total amount of money acquired or the average amount of funds held by the entity over the same time period as the funding cost is measured.
4. How is the Cost of Funds Rate calculated?
Using the basic formula: (Total Funding Cost / Total Funds Secured) multiplied by 100 to express it as a percentage.
5. Is a lower Cost of Funds Rate better?
Generally, yes. A lower rate means it's cheaper for the entity to get the money it needs, potentially leading to higher profit margins on lending or investments, or the ability to offer more competitive rates to customers/borrowers.
6. Does this calculator provide an annualized rate?
No. The rate calculated is for the specific period you input the costs and secured funds for. If you input annual costs and annual average funds, the result is an annual rate. If you input monthly figures, the result is a monthly rate.
7. What inputs are required for this calculator?
You must provide valid, non-negative numbers for both "Total Funding Cost" and "Total Funds Secured". The "Total Funds Secured" must also be greater than zero to avoid division by zero.
8. Can I use this for personal finance?
While typically used in corporate or financial contexts, the basic principle applies. You could calculate the 'cost' of a personal loan by dividing total interest/fees by the loan amount, though 'Cost of Funds' specifically relates to entities acquiring capital for onward use.
9. Why is 'Total Funds Secured' often an average?
Funds secured (like bank deposits or outstanding loan balances) can fluctuate over a period. Using an average amount provides a more representative figure for the capital that generated the funding costs over that period.
10. Does this tool calculate the Weighted Average Cost of Funds?
No, this is a basic tool for calculating the simple rate based on total cost and total amount. Weighted Average Cost of Funds (WACF) is a more complex calculation used by financial institutions that considers the cost of each specific funding source (deposits, different types of borrowing) weighted by its proportion of the total funds.
