According to Gallagher, an expert in business ethics, it is unethical to fail to pay a debt on or before its due date. Business organizations are required to observe certain moral principles, when dealing with matters concerning payment and collection of debts. Every business organization has a moral responsibility to pay its debts on or before the expiry of the debt period (Gallagher). Gallagher explains that in case a business is unable to meet its debt obligations to its creditors, perhaps due to financial difficulties, proper arrangements should be done to inform the concerned creditors about the situation, and mutually agree to re-set the payment period. This is necessary because business organizations need to build good credit relationships with their creditors to ensure continuity of their operations.
Based on Gallagher’s argument concerning repayment of debts, Ajax Inc. should not implement Joe’s proposal: to extend debt payment period by four days. This is because apart from failing to conduct its business operation ethically, Ajax Inc. is likely to face negative consequences. Such consequences may include lose of current suppliers and bad reputation among its suppliers, resulting to lose of credibility among all other suppliers in the industry. Moreover, Ajax Inc. may have problems sourcing credit suppliers in the future, hence being forced to operate under cash basis, which might not be possible in normal business operations.
As a recommendation, Ajax Inc. can make use of factoring and invoice discounting to raise the required working capital. Factoring is a short-term method of raising funds. In many businesses, credit sales made to customers remain outstanding for the period of time, which the customers have been allowed (Methods of Raising Capital). During the outstanding period, a business can assign its book debts to a bank, or to a factoring agent, in exchange of cash. The factoring agent or the bank releases a certain percentage of the book debts to the business concerned. Usually, the bank or the factoring agent deducts a certain percentage of the total value of book debts to cover for the debt collections expenses. This percentage may range between 5 and 15 percent, depending on the volume of the debts, and the probability of default by some debtors (Methods of Raising Capital). Therefore, the business passes the responsibility of collecting its debts to a bank or a factoring agent.
This would be a very good method of raising the required $300,000 within a short period. If the current book value of Ajax Inc.’s debts is not enough to raise the required amount of money, the organization can arrange to factor its credit sales for the next three months, on monthly basis. That is, at the end of every month, all credit sales are factored to either a bank or a factoring agent. Moreover, Ajax Inc. can develop strategies for increasing its monthly sales to increase its credit sales. Therefore, Ajax Inc. would have increased book value of credit sales at the end of every month, thus increasing the amount it would raise through factoring.
As opposed to extending payment of creditors, factoring of credit sales is advantageous to businesses both in the short-term and in the long-term. In the short-term factoring allows a business to raise up to 85 percent of the value of its outstanding credit sales. In the long-term, factoring allows a business to access continuous supply of funds, which can be used to increase sales. Factoring also allows a business to pay its creditors on prompt basis and buy bulk purchases on cash basis, thus enjoying huge cash and quantity discounts (Methods of Raising Capital).
Based on the aforementioned merits of factoring, Ajax Inc. should consider raising the required working capital through factoring its credit sales, as opposed to extending payment of its creditors by four day. Factoring is a reliable and quick source of short-term funds. Ajax Inc. will not incur any cost, since the factoring agent will deduct the cost of capital from the book value of outstanding debts.
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