Student Forums CMA Part 2 Section B: Corporate Finance B.4. Working Capital Management Question ID: ICMA 10.P2.144 (Topic: Short-Term Bank Loans)

Question ID: ICMA 10.P2.144 (Topic: Short-Term Bank Loans)

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  • #238146
    Haneen Salih
    Participant

    Hi,

    Why borrowing from the bank needs to be for 30 days? 

     

     

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  • #238148
    Lynn Roden
    HOCK international

    Hello Haneen Salih,

    Thirty days is the difference between the last day on which the early payment discount is available for an invoice (day 15) and the date the payment in full is due (day 45) if the payment is not made within the discount period. After day 45, the payment is delinquent.

    If Dexter borrows from a bank so they can pay at day 15 and take the discount, they will borrow for 30 days so that they can then pay on the same day they would have paid the supplier without the loan (day 45), except they will be paying the bank back along with interest instead of paying the supplier. Their loan will be for the discounted amount. Even though Dexter will need to pay the loan back with interest, Dexter will still be paying less than they would have paid if they had waited to pay the supplier until day 45 and not gotten the discount.

    Lynn

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