Hand-to-Mouth is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $10,000, but the supplier will give them a 2% discount if they pay by today (when the discount period expires). That is, they can either pay $9,800 today, or $10,000 in one month when the net invoice is due. Because Hand-to-Mouth does not have the $9800 in cash right now, it is considering three options:

Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $10,000 in one month.

Alternative B: Borrow the money from Bank A, which has offered to lend the firm $9,800 for one month at an APR (compounded monthly) of 12%. The bank will require a (no-interest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee, which means Hand-to-Mouth must borrow even more than the $9,800.

Alternative C: Borrow the money from Bank B, which has offered to lend the firm $9,800 for one month at an APR of 15% (compounded monthly). The loan has a 1% loan origination fee.