The industry average is about 75 days. The firm has also experienced an increase in its business in the last 2 years and has been buying more inventory. The management wants to increase the amount of permanent inventory stock, and projects an increase in the accounts receivable balance.
The firm is considering two financing options: a 7-year loan at the rate of 8.5%; and a 90 note at prime plus 2%, which would help the firm with liquidity challenges.
Write a memo to management of no more than 350 words in which you respond to the following:
• Which financing option do you recommend and why? Prime rate is 5%. Explain the relevance of the matching method in making this decision.
• Is there a scenario where both options may be used? Explain.
• The firm's average days payable outstanding is 45, and the industry average is 60. Determine possible methods to use payables as a short-term financing strategy. Recommend the most beneficial method and include your rationale.
• Suppose the firm's vendors offer credit terms of 2/10, net 45. Might the strategy be different in this case and why?