Financing a Company what's the best way?

[Librazoe1982]

Ok, hi everyone, I know it's been awhile since I have been here to post. I need some help with

the Financing subject.

We need to borrow $500,000. The bank we are using is offering us a loan at
8 1/4 % interest rate loan, with a 20 % compensating balance requirement, or as an alternative, 9

3/4 %with additional fees of $5,500 to cover services the bank is providing. The rate on the loan

is floating. I think that means the fee changes as the prime rate chages.

My questions are?
1. Out of the two different loans, which of the two which one will carry the the lower effective rate?

2. If the loan with a 20 % compensating balance requirement were to be paid off in monthly payments (1 yr), what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)

3. What if the the money from the loan with the compensating balance requirement would be used

to take cash discounts. For instance, if the discounts were 1.5/10, net 50, would it be a good idea for us to borrow the funds to take the discounts?

4. If we took 80 days to pay the bills and continued to do it in the future and it didn't take the cash discount, should it take discount?

5. Since the interest rate is floating, the rates can go up. What if the rates went up by 2% and the rate on the loan goes up by 2% as well. How much would the rate on the loan with the compensating balances be? What would the interest to dollars be to the original loan amount with the new rate?

6. If hedging were to occurr, if we were to decide to hedge our position in the future, and we sell $500,000 worth of 12-month contracts on Treasury Bonds. A year later, the interest rate go up 2% across the board and the Treasury Bond futures have down to $488,000. Will we have successfully hedged the 2 % increase in interest rates? How can we show this in dollar amounts?

I hope someone can help me with this. It's all confusing to me.

[bananaman]

You should ask the bank who is making the loan these questions, since they are quite specific to the loan itself.

[ScottRobertson]

Personally, I don't feel like crunching all of those numbers for you .. but I will tell you to be very careful about using a floating rate.

What's the government doing right now? Printing money to stimulate the economy.

What happens when the economy starts to recover, but the government does not stop the printing presses in time (which WILL happen - it's impossible to time it perfectly)? Inflation.

What happens when there is inflation? Your floating rate goes up.

I've heard economists called for inflation of 5-6% .. that will be a significant change to your loan payments and you need to make sure that you can handle that if it happens.

It's true that in almost all cases, you are better off with a variable rate, but right now is a time that I do not believe you are. I suggest that you ask about their fixed rate loans as well and work the numbers on that.