What Is Weighted Average Cost of Capital (WACC)?

The Weighted Average Cost of Capital (WACC) is the average interest rate your organisation pays to borrow money and buy things. It's the total cost of all the money your firm needs to run and develop.

WACC informs you how much money you need to make to make taking on debt worthwhile. If you pay 8% on all your loans, any investment must yield more than 8% to be worthwhile.

What is the importance of WACC?

WACC may help you choose better ways to get money and invest it. Knowing your true cost of capital lets you figure out if a new project, buying new equipment, or expanding your business makes financial sense.

If you could only sell stock for £9, you wouldn't buy it for £10. Your business works the same way. If your projects only make 6% but your funding costs 8%, you're losing money.

According to a 2026 report by the Centre for Finance, Innovation and Technology (CFIT), fewer than half of SME loan applications now succeed, with around 65,000 businesses declined annually. The report found that nearly two thirds of declined businesses had identifiable, addressable credit profile issues. Knowing your WACC can help you decide if it makes sense to borrow more money and ensure you're pursuing projects that generate returns above your cost of capital.

How to calculate WACC

The WACC formula appears scary, but it's really just a bunch of simple parts:

WACC formula

WACC = (E/V x Re) + (D/V x Rd x (1 - Tc))

Where:

• E = the value of equity in the market

• D = the market value of the debt

• V = the total value (E + D)

• Re = the cost of equity

• Rd = the cost of debt

• Tc = the tax rate for corporations

Example calculation

Here's a real-world example. Let's say your business is valued £500,000, with £300,000 in equity and £200,000 in debt. You think your cost of equity is 12%, and your loan costs 7% a year. Your WACC would be:

WACC = (12% of £300,000/£500,000) + (7% of £200,000/£500,000 x 0.75) WACC = (0.6 times 12%) plus (0.4 times 5.25%) WACC = 9.3% (7.2% + 2.1%)

This indicates that each investment or initiative must make more than 9.3% extra money for your firm to be worth it.

Calculating the cost of equity

The cost of equity is harder to figure out than the cost of debt because there is no set interest rate. For small firms, think about what return you'd need to make owning your business worth the risk instead of investing somewhere else.

One easy way to look at it is:

The risk-free rate is what you would make on government bonds, which is nearly 5% right now, due to geopolitical tensions (figures are correct as of Mid 2026).

Industry risk premium (the extra return you need to make up for the hazards in your field, usually 5% to 10%)

Company-specific risk (extra return for the problems that are particular to your firm)

Depending on the sector and risk profile, the cost of equity for most small enterprises in the UK is between 12% and 20%.

What influences WACC?

Interest rates – When the Bank of England's base rate goes up, it costs more to borrow money. Rates are now 3.75% (as of April 2026), which means that debt is more expensive than it was a few years ago. This makes WACC go up.

Capital structure – Debt is usually cheaper than equity because lenders take less risk and interest payments can be deducted from taxes. However, having too much debt may make your finances riskier, which raises the cost of both your loan and your equity.

Business risk - enterprises that are stable and predictable and have solid cash flow usually have a lower WACC than new enterprises or businesses in unstable industries.

Tax rates – The corporate tax rate affects the cost of debt component in WACC calculations, as interest payments are generally treated as tax-deductible expenses under UK tax rules. (for advice around tax, please seek advice from a certified tax professional)

How SMEs use WACC

WACC is more than just an academic idea. Here's how small firms may use it. It's a useful tool for making judgments every day.

Check out investments - For example, if you're thinking about buying new equipment for £50,000 that would make £6,000 a year, that's a 12% return. It makes sense if your WACC is 9%. It doesn't if your WACC is 14%.

Pick between loan and equity - Adding more debt lowers WACC at first because debt costs less than equity. But after a certain point, taking on more financial risk raises WACC again.

Compare to your competitors - If your WACC is 12% and your competitors' is 8%, you're at a disadvantage. You need to make more money to pay for your rising borrowing fees.

Set your rates right - Your prices should cover your direct costs and overhead, and they should also give you a return that is higher than your cost of capital.

Making capital work harder for your business

Knowing WACC helps you figure out how much it really costs to fund your business. If you're thinking about a new project, looking at finance possibilities, or preparing for growth, understanding how much your capital really costs gives you the power.

Funding Circle business loans have clear, fixed-rate prices that start at 6.9% per year. You can make decisions that really help your business grow when you know your numbers.

In as little as one hour, you can get a decision. The average application takes around seven minutes, and funds are typically paid out within 48 hours. You can borrow between £10,000 and £750,000 for lengths of 6 months to 6 years. No costs for paying off early.

Before you apply, use our business loan calculator to find out roughlyhow much you'll pay.

More than 110,000 businesses in the UK trust us to help them reach their goals. Are you ready to lower your cost of capital?

22/05/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.