Why do different sources of finance have different costs?

Answer 1

Different sources of finance have varying costs due to factors such as risk, time horizon, and the return expectations of lenders or investors. Higher-risk financing, like equity, often demands a greater return due to the uncertainty of returns, while lower-risk options, such as bank loans, typically have lower interest rates. Additionally, the terms and conditions associated with each financing source can also influence costs, as longer-term financing may incur higher fees or interest rates. Overall, the trade-off between risk and return plays a crucial role in determining the cost of finance.