Global Markets, Inc. was experiencing a shortage of cash. Consequently, the President was considering two options to provide an immediate inflow of cash. The first option was to sell \($2\) million of the company’s accounts receivable on a nonrecourse basis. The factoring cost would amount to 15.5 percent of the value of the factored receivables. The second option was to obtain a 60-day loan from a local bank using its outstanding receivables as collateral. Under the loan agreement, Global Markets would be charged 13 percent annual interest on the outstanding loan and would pledge receivables equal to 122 percent of the loan amount (a loan-to-value ratio of 82 percent).
Required
Compare the cost under each financing option. Which option is better for the company? Why?