Problem: Richenstein Enterprises is in the business of selling dishwashers. The firm needs $192,000 to finance an anticipated expansion in receivables due to increased sales. Richenstein's credit terms are net 40, and its average monthly credit sales are $180,000. In general, the firm's customers pay within the credit period; thus, the firm's average accounts receivable balance is $240,000.
The comptroller of Richenstein Enterprises, Mr. Gee, approached their bank for the needed capital, placing the accounts receivable as collateral. The bank offered to make the loan at a rate of 2% over prime plus a 1% processing charge on all receivables pledged. The bank agreed to loan up to 80% of the face value of the receivables pledged.
a. Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000.The prime rate is currently 13%.
b. Gee also requested a line of credit for $192,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 4% over prime and required a 12% compensating balance.Gee currently maintains an average demand deposit of $40,000. Estimate the cost of the line of credit to Richenstein.
c. Which source of credit should Richenstein Enterprises select?