The Barnes Corporation has just acquired a large account. As a result, it will soon need an additional $95,000 in working capital. It has been determined that there are three feasible sources of funds:
a. Trade credit: The Barnes company buys about $50,000 of materials per month on terms of “3/30, net 90.” Discounts currently are taken.
b. Bank loan: The firm’s bank will loan $106,000 at 13 percent. A 10 percent compensating balance will be required.
c. Factoring: A factor will buy the company’s receivables ($150,000 per month), which have an average collection period of 30 days. The factor will advance up to 75 percent of the face value of the receivables at 12 percent on an annual basis. The factor also will charge a 2 percent fee on all receivables purchased. It has been estimated that the factor’s services will save the company $2,500 per month – consisting of both credit department expenses and bad debts expenses. Which alternative should Barnes select on the basis of annualized percentage cost?