Question Tag: Warehouse Loan

Kaki Limited needs to finance a seasonal bulge in inventories of GH¢400,000. The funds are needed for six months. The company is considering the following possibilities:

i) Warehouse loan received from a finance company. Terms are 12 percent with an 80 percent advance against the value of the inventory. The warehousing costs are GH¢7,000 for the six-month period. The residual financing requirement, which is GH¢400,000 less the amount advanced, will need to be financed by foregoing cash discounts on its payables. Standard terms are 2/10, net 30. However, the company feels it can postpone payment until the fortieth day without adverse effect.

ii) A floating lien arrangement from the supplier of the inventory at an effective interest rate of 20 percent. The supplier will advance the full value of the inventory.

iii) A field warehouse loan from another finance company at an interest rate of 10 percent. The advance is 70 percent, and field warehousing costs amount to GH¢10,000 for the six-month period. The residual financing requirement will need to be financed by foregoing cash discounts on payables as in the first alternative.

Required:
Evaluate the feasible method of financing the inventory needs of the firm.