You're small business's line of credit at Local Bank has a 10% interest rate. You would...

You're small business's line of credit at Local Bank has a 10% interest rate. You would like your customers to pay at the time services are rendered buy sadly most pay at the end of the billing month. You're thinking of offering a time of service payment discount. You have run the idea past a few of your customers and the general response is:

-No motivation to pay at the time of service for a half percent discount.

-Some motivation to pay at the time of service for a 3/4 percent discount.

-High motivation to pay at the time of service for a one percent discount.

Which discount, if any, should be offered? What is the justification of your answer?

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Expert Solution

The discount out of the given three options which should be offered to the customers is one percent discount in exchange of hand to hand payment at the time of the service.

This will be beneficial for the service provider as it would give him the liquidity to spend the cash. The seller will have the immediate payment for the service he has provided instead of waiting for around a month for the money. Also, considering the time value of money, the money will be of more worth to the seller at the time of service providing as in the future, inflation will reduce the value of money. A little discount as of 1% will encourage the customers to make prompt payments and seller will have cash in hand.

Rahul Sunny answered 2 years ago

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