(Cost of secured short-term credit) To finance its working capital needs, Omega company needs to borrow $600,000 for a period of 6 months. For this purpose, Omega 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.
Which source of finance should Omega opt for and why?
