Question

Your startup is currently cash-constrained, and you must make a decision about whether to delay paying one of its suppliers, or take out a loan. You owe the supplier $7000 with terms of 3/10 Net 40, so the supplier will give you a 3% discount if you pay today (when the discount period expires). Alternatively, you can pay the full $7000 in one month when the invoice is due. You are considering three options:

Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $7000 in one month.

Alternative B: Borrow the money needed to pay its supplier today from Bank A, which has offered a one-month loan at an APR of 12%. The bank will require a (no-interest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee. Because your startup has no cash, you will need to borrow the funds to cover these additional amounts as well.

Alternative C: Borrow the money needed to pay its supplier today from Bank B, which has offered a one-month loan at an APR of 15%. The loan has a 1% loan origination fee, which again you will need to borrow to cover. For each alternative, what is the amount owed in one month? Which alternative is the cheapest source of financing for your startup?

a. Alternative A: the amount owed in one month is________ $. (round to full $)

b. Alternative B: the amount owed in one month is ________$. (round to full $)

c. Alternative C: the amount owed in one month is___________ $. (round to full $)

d. The cheapest source of financing is alternative ___________. (fill in "A", "B", or "C")

Answer 1

a)	Alternative A	7000
b)	Money borrowed
	7000 discounted by 3%	6790.00
	Compensating balance 5%	339.50
	Origination fee	100.00
	Total loan	7229.5
	APR	12.00%
	Repayment	8097
c)	Alternative C
	7000 discounted by 3%	6790.00
	Origination fee	67.90
	Total loan	6857.90
	APR	15.00%
	Repayment	7887
	Clearly alternative A is the cheapest