Hand-to-Mouth (H2M) is current

Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if they pay today (when the discount period expires). Alternatively, they can pay the full $10,000 in one month when the invoice is due. H2M 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 needed to pay its supplier today from Bank A, which has offered a one-month loan at an APR of 12%. The bank will require a (nointerest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee. Because H2M has no cash, it will need to borrow the funds to cover these additional amounts as well.

Alternative C: Borrow the money needed to pay its supplier today from Bank B, which has offered a one-month loan at an APR of 15%. The loan has a 1% loan origination fee, which again H2M will need to borrow to cover.

Which alternative is the cheapest source of financing for Hand-to-Mouth?

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