What’s the cost of borrowing money?

Most food and beverage processors rely on some form of credit from financial institutions to manage and grow their operations, whether to finance projects like a new plant, equipment modifications and installations, or lines of credit to finance additional inventories.

According to Innovation, Science and Economic Development Canada, food and beverage processors carry an average debt-to-equity ratio of close to 80%, which means they use a lot of borrowed money.

So what’s the cost of borrowing money - that is, what is your interest rate - and how is that determined? When the financial stakes are so high, it’s critical to understand the many elements to answer that question.

Here are four key considerations of the cost of borrowing money:
1. Short-term borrowing

The factors determining the interest rate of short-term borrowed money for an operating line of credit differ from those that establish your interest rate on a longer-term loan or mortgage.

Short-term interest rates used to set variable loan and mortgage rates are determined directly by the Bank of Canada and its overnight (or policy interest) rate. This overnight interest rate is the main instrument the Bank of Canada uses to manage the general inflation rate in the economy.

Read More