Conditions would it be economically advantageous for an individual or business to borrow money

Full Answer Section

      Example:

• Cash Discount: 3% (If you pay within 10 days, you get 3% off the invoice amount)
• Interest Rate on Loan: 2% (Annual Percentage Rate for a short-term loan)

In this scenario, borrowing money makes sense because the 3% discount is greater than the 2% interest cost. Ensuring Savings Outweigh Borrowing Cost: Here's how to ensure borrowing doesn't negate the discount benefit:

• Calculate the Net Benefit: Compare the discount amount saved with the loan interest cost. Only borrow if the discount saved is greater than the interest paid.
• Borrow the Right Amount: Borrow only the exact amount needed to cover the invoice after the discount. Borrowing extra money incurs unnecessary interest charges.
• Short-Term Loans: Seek short-term loans with the lowest possible interest rates to minimize borrowing costs. Explore options like lines of credit or credit cards with grace periods (if paying in full within the grace period).

Additional Considerations:

• Access to Capital: This strategy hinges on readily accessing loans at a lower interest rate than the cash discount. Individuals or businesses with poor credit scores may not qualify for favorable loan terms.
• Discount Terms: Some cash discounts may have strict timeframes (e.g., 5 days). Ensure you can repay the loan promptly to avoid late fees and potential loss of the discount.

Conclusion Borrowing money to leverage a cash discount can be a smart financial move, but careful calculations and ensuring the interest rate is lower than the discount are crucial. It's essential to weigh the pros and cons and consider alternative financing options before making a decision.  

Sample Answer

     

It can be economically advantageous for an individual or business to borrow money to take advantage of a cash discount under specific conditions. Here's a breakdown:

Conditions for Borrowing to be Advantageous:

• Discount Rate > Interest Rate: The key factor is the difference between the cash discount offered by the supplier and the interest rate charged on the borrowed money. If the discount rate is higher than the interest rate, borrowing to pay early becomes profitable.