Value of Reverse Factoring in Multi-stage Supply Chains

Abstract

We present a mathematical model for integration, analysis, and optimization of operational and financial processes within a supply chain. Specifically, we consider commercial transactions of a large corporate customer with a small or medium-sized supplier. We show how application of reverse factoring influences the operational and financial decisions of these firms. While some empirical work on reverse factoring exists within research literature, our model constitutes the first analytic treatment of the problem, using the value framework of financial theory. We show how the value of reverse factoring results from, and is conditioned by (1) the spread in external financing costs, (2) the operating characteristics of the supplier, including the implied working capital policy, and (3) the risk-free interest rate. Thus, in addition to providing managerial insights that integrate operational and financial perspectives, our findings disclose an important relation of these elements to the broader macro-economic context.

Keywords: Supply Chain Finance, Joint Production and Financial Decisions, Reverse Factoring, Informational Asymmetries

JEL Classification: G10, G30