Chapter 15, Problem 6SP

(Cost of secured short-term credit) The Marlow Sales and Distribution Co. needs $1.5 million for the 3-month period ending September 30, 2015. The firm has explored two possible sources of credit.

1. a. Marlow has arranged with its bank for a $1.5 million loan secured by its accounts receivable. The bank has agreed to advance Marlow 75 percent of the value of its pledged receivables at a rate of 9 percent plus a 1 percent fee based on all receivables pledged. Marlow’s receivables average a total of $1.75 million year-round.
2. b. An insurance company has agreed to lend the $1.5 million at a rate of 8 percent per annum, using a loan secured by Marlow’s inventory of salad oil. A field-warehouse agreement would be used, which would cost Marlow $2,000 a month. Which source of credit should Marlow select? Explain.