Bank Loan Considerations: Assume you started a new business last year with $50,000 of your own money that was used to purchase equipment. Now you are seeking a $25,000 loan to finance the inventory needed to reach this year's sales target. You have agreed to pledge your venture's delivery truck and your personal automobile to support the loan. Your sister also has agreed to cosign the loan. During your initial year of operation, you paid your suppliers in a timely fashion.

1. Analyze the loan request from the viewpoint of a lender who uses the "five Cs" of credit analysis as an aid in deciding whether to make loans.

Capacity to pay:

Capital:

Collateral:

Conditions:

Character:

2. Assume you are currently carrying an accounts receivable balance of $10,000. How might you use accounts receivables to obtain an additional bank loan?

3. Assume at the end of next year, you will have an accounts receivable balance of $15,000 and an inventories balance of $30,000. If a bank normally lends an amount equal to 80 percent of accounts receivable and 50 percent of inventories pledged as collateral, what would be the amount of a bank loan a year from now? You must show the math (formula) that led to the answer to this question. Showing the answer alone without the formula is not acceptable.

Factor Financing: Assume the operation of your business resulted in sales of $730,000 last year. Year-end receivables are $100,000. You are considering factoring the receivables to raise cash to help finance your venture's growth. The factor imposes a 7 percent discount and charges an additional 1 percent for each expected ten-day average collection period over thirty 30 days.

4. Estimate the dollar amount you would receive from the factor for your receivables if the collection period was thirty 30 days or less. You must show the math (formula) that led to the answer to this question.