What factor directly influences a firm's cost of borrowing capital?

A firm's cost of borrowing capital is primarily influenced by its credit rating. This rating reflects the firm's creditworthiness, which is essentially a measure of how likely it is to repay borrowed funds. A high credit rating indicates that the firm is seen as a low-risk borrower, which in turn allows it to secure loans at lower interest rates. Conversely, if a firm has a low credit rating, lenders view it as a higher risk, leading to higher interest rates to compensate for the increased likelihood of default.

The credit rating is assessed based on multiple factors, including the firm's financial health, debt levels, and past repayment history. A solid credit rating not only helps reduce borrowing costs but also can provide easier access to capital markets and financing opportunities. Thus, having a strong credit rating is crucial for firms looking to minimize their capital expenses and enhance their financial viability.