15 -6. (Cost 10an alternative? what effect would this have of secured short-term

Question

15 -6. (Cost 10an alternative? what effect would this have of secured short-term credit) To finance its working capital needs, Omega any needs to borrow $600,000 for a period of 6 months. For this purpose, Omega com is considering three options: a. A loan from a microfinance organization pledged to accounts receivables, with an interest rate of 10 percent. The microfinance organization agreed to provide a loan that equals 80 percent of total accounts receivables outstanding and charge an additional service fee of 2 percent on total accounts receivables. b. A loan from a small bank that is pledged to inventories with an interest rate of 8 percent. A 3 percent service fee is required from total inventories and the bank agreed to issue a loan that is equal to 95 percent of total inventories c. A bank-secured loan using a warehouse as collateral. The bank requested Omega to create insurance for the warehouse, which costs $1,000 per month at an interest rate of 11 percent. ch source of finance should Omega opt for and why?

Explanation / Answer

Omega should opt for that finance option which would cost it the least of the above.

Thus, it shoul opt for option C bank secured loan using warehouse as collateral as its cost is the lowest.

Cost under various options:

A. 42000 (600000*10%/2 plus .02*600000)(Assuming account receivables equal to 600000 since amt not given)

B.42000 (600000*8% plus 3%*600000)(Assuming account inventories equal to 600000 since amt not given)

C.39000 (600000*11% plus 1000*6)

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