Prompt: Blazer Company will have a cash shortfall of $250,000 for about two months in the middle of the year. The options available to Blazer are:
a. Borrow the entire $250,000 from its bank. The bank will charge Blazer the current prime rate plus 1%.
b. Blazer typically has at any time $400,000 or more in accounts receivable. The accounts receivable finance company will loan Blazer up to 70% of its accounts receivable and will charge 8% interest.
c. Blazer can factor its accounts receivable to a factoring company. The factoring company will charge Blazer $4,000 for every 30 days that it has to factor a block of $250,000.
Advise the leaders of Blazer which will be the best option for them to use.
Requirements: Show the costs and describe the risks and benefits of each method of financing. Show enough of your work so that it is clear how you arrived at your determination.