Estimating the cost of capital: considerations for small business

Purpose – For publicly traded firms, calculating the cost of capital is predicated typically on information from the financial markets. Small businesses do not have the necessary market-based information. As an alternative to traditional proxy approaches, this paper argues for a multi-criteria model to determine an appropriate equity risk premium, and thereby, a cost of capital. Design/methodology/approach – The study proposes a multi-criteria model – an analytical hierarchy process (AHP) – to determine the cost of capital for small businesses. Findings – Since the three proxy methods are shown to have numerous shortcomings, the use of the AHP model is clearly a method to determine the equity risk premium and the cost of capital for small businesses. Research limitations/implications – The model requires small business managers to identify all information sources for the required input data. Originality/value – The article offers practical help to lenders and small businesses wishing to invest in new capital projects.