Kalahana Gas Inc. (KGI) is an oil and gas refinery. The company needs to raise financing for a new expansion project and is looking to raise $5,000,000. Currently, the company is considering two financing alternatives that it has been offered by its bank, High Bank Inc. (HBI):

1. Line of credit. HBI has offered to lend up to 80% of the balance of the receivables and inventories, which currently represents a line of credit of $5,000,000, which will be the maximum amount allowable under this facility. The maximum amount will be available to be borrowed until the line of credit matures in one year, at which time it will have to be revaluated and renewed. KGI will pay interest on any borrowed amount at prime plus 2% (prime is currently 3%) and also pay a standby fee of 0.3% on any unused portion. The prime rate will be reset every three months during the term of the loan.

2. Term loan. HBI will lend $5,000,000 for 10 years. The interest rate of 7.5% is payable monthly and the principal is due at maturity. The security for the term loan is the land, buildings, and equipment that KGI currently owns.

Required: Discuss the advantages and disadvantages of each of these financing alternatives and the implications for KGI and provide a recommendation.