Interest: What It Really Costs Your Business

February 9, 2026

Interest: What It Really Costs Your Business

Interest is one of those things most business owners accept without really questioning. It shows up on the profit and loss statement, gets paid every month, and quietly becomes part of “how things work.” But interest isn’t just a line item — it’s the cost of time, risk, and leverage. And depending on how it’s used, it can either support growth or slowly drain momentum.

Understanding interest — not just paying it — is an important part of financial clarity.

What Interest Actually Represents

At its simplest, interest is the cost of borrowing money. It’s what a lender charges in exchange for giving you access to capital before you’ve earned it yourself. That cost is tied to risk, timing, and structure — not just the interest rate printed on the loan agreement.

Interest is not inherently good or bad. It’s a signal. It tells you something about how the business is being funded and how much pressure your cash flow is under to support that funding.

When Interest Can Make Sense

Interest can make sense when it’s tied to debt that supports growth, efficiency, or long-term value. If borrowed funds are being used to invest in something that generates more cash than the interest costs over time, the tradeoff can be reasonable.

In these situations, interest is predictable and planned for. It’s built into pricing, cash flow forecasts, and decision-making. The business understands what it’s paying for and why, and the interest expense doesn’t interfere with daily operations or long-term strategy.

When Interest Starts Becoming a Problem

Interest becomes problematic when it’s no longer intentional. If interest expense is growing simply because balances keep increasing, or because the business is constantly rolling debt forward, it’s often a sign of underlying cash flow strain.

Another red flag is when interest payments limit flexibility. If interest eats into cash needed for payroll, inventory, or reinvestment, it stops being a neutral cost and starts becoming a constraint. At that point, interest isn’t supporting growth — it’s slowing it down.

The Tax Deduction Myth Around Interest

One of the most common misconceptions about interest is that it’s “good” because it lowers taxable income. While it’s true that interest expense is often deductible, that doesn’t mean it’s beneficial.

Paying interest just to save on taxes is like spending a dollar to save a quarter. Tax strategy should never be the sole justification for carrying debt. A deduction doesn’t make a bad cash flow decision a good one — it just makes it slightly less painful.

Interest vs. Principal: Why the P&L Doesn’t Tell the Whole Story

Another reason interest is misunderstood is because of how it shows up in financial reports. Interest expense appears on the profit and loss statement, but loan principal payments do not. Principal payments hit cash directly, without affecting profit.

This is where many business owners feel confused or frustrated. The business may appear profitable, yet the bank account still feels tight. Without understanding how interest and principal work together, it’s easy to underestimate how much debt is actually costing the business in real cash terms.

How Interest Impacts Cash Flow Decisions

Interest affects more than just monthly expenses — it affects optionality. High or growing interest obligations reduce your ability to respond to opportunities, weather slow periods, or invest strategically. Every dollar committed to interest is a dollar that can’t be used elsewhere.

From a planning standpoint, interest should always be evaluated alongside cash flow projections. The question isn’t just “Can we afford this payment today?” but “What does this payment prevent us from doing tomorrow?”

A CFO Lens on Interest

From a strategic perspective, interest should always be visible, intentional, and revisited regularly. Rates change. Business conditions change. What made sense a year ago may not make sense today.

Interest should be monitored relative to revenue growth, cash flow stability, and overall leverage. When it’s small, predictable, and aligned with strategy, it’s manageable. When it grows quietly in the background, it often becomes a source of stress before anyone realizes why.

The Bottom Line

Interest isn’t just the cost of borrowing money — it’s the cost of financial decisions made over time. When it’s intentional and planned, it can be a reasonable tradeoff for access to capital. When it’s reactive or ignored, it can quietly drain cash and limit growth.

If interest feels heavier than expected, confusing, or constantly present despite strong revenue, that’s usually a signal worth paying attention to. More clarity around interest doesn’t mean eliminating debt altogether — it means understanding what your business is paying for and whether that cost still makes sense.

Because clarity isn’t about avoiding financial tools. It’s about using them with intention.