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?

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

American Bank has given you a line of credit of $20,000. Interest on the borrowed amount...

American Bank has given you a line of credit of $20,000. Interest on the borrowed amount is 20% per year. You must maintain a 25% compensating balance on outstanding loans and pay a commitment fee (paid at the end of the period) of 2 % of the unused portion of the credit line. 1. Calculate the AFC if the amount borrowed is $5,000 for 6 months. 2. Calculate the AFC if the amount borrowed for 6 months is the full...

We have a line of credit with a local bank that our company uses for purchasing...

We have a line of credit with a local bank that our company uses for purchasing inventory. Suppose I use this credit source to buy a new motorcycle for my personal use without the bank's knowledge. Which of the following problems describes this situation? A. Securities fraud B. Tax evasion C. Adverse selection D. Moral hazard

The treasurer of a small bank has borrowed funds for 3 months at an interest rate...

The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73% and has lent funds for 6 months at 7.87%. a. Represent the exposure on cash flow diagrams. b. To cover his exposure created by the mismatch of maturities, the dealer signs a forward loan. Calculate this treasurer’s break - even forward rate on interest, assuming no other costs. c. Assume that instead, the treasurer decides to wait 3 months and take a...

You are appointed as a credit manager in the local branch of ZAA Bank that is...

You are appointed as a credit manager in the local branch of ZAA Bank that is situated in an industrial area. Most customers are businesses. Provide a brief summary of important credit risk factors relating to the following forms of business that you as a banker should keep in mind: a. Sole proprietor b. Partnership c. Private company

A firm has established a revolving line of credit for $900,000 with a bank at a...

A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

assume Alex borrowed $280 on his personal line of credit credit. interest charge at a rate...

assume Alex borrowed $280 on his personal line of credit credit. interest charge at a rate of 13% but calculated on a daily basis Alex is required to pay a minimum of 5% of the remaining loan balance every month. what would be Alex's first monthly loan payment assume a 30 day month and a 365 days a year. round your answer to 2 decimal places

A bank just approved your small business loan for $20,000. The loan has an interest rate...

A bank just approved your small business loan for $20,000. The loan has an interest rate of 8.0% and will be repaid with 10 end-of-year payments. What is the required annual loan payment? Halfway through the loan's life, what is the loan’s remaining balance? What percentage of the total payments made during the first five years will be made toward interest?

Determine the actual annual interest rate on a $100,000 line of credit with an annual percentage...

Determine the actual annual interest rate on a $100,000 line of credit with an annual percentage rate of 10% compounded monthly. The bank requires that a 5% compensating balance be placed in an interest-bearing account that pays an annual percentage rate of 1.5% compounded monthly. The average daily balance is anticipated to be $75,000, excluding the compensating balance and interest due on the line of credit.

If you deposit $800 into a bank account today, what annually compounded interest rate would you...

If you deposit $800 into a bank account today, what annually compounded interest rate would you need to earn in order to have $2,000 in 19 years? Enter your answer as a percentage rounded 2 decimal places. Do not enter the % sign.

Your credit card has a balance of ?$3100 and an annual interest rate of 18?%. You...

Your credit card has a balance of ?$3100 and an annual interest rate of 18?%. You decide to pay off the balance over two years. If there are no further purchases charged to the? card, you must pay ?$154.76 each month? , and you will pay a total interest of ?$614.24. Assume you decide to pay off the balance over one year rather than two. How much more must you pay each month and how much less will you pay...

Question