A Supply Chain Theory of Factoring and Reverse Factoring

Management Science (Forthcoming)

56 Pages Posted: 12 Sep 2018 Last revised: 29 Jul 2020

See all articles by Panos Kouvelis

Panos Kouvelis

Washington University

Fasheng Xu

Syracuse University - Whitman School of Management

Date Written: July 23, 2020

Abstract

Factoring is a financial arrangement where the supplier sells accounts receivable to the factor against a premium, and receives cash for immediate working capital needs. Reverse factoring takes advantage of the retailer's payment guarantee and the credit rating differential between small supplier and large retailer, enabling the supplier to receive financing at a more favorable rate. We develop a supply chain theory of (recourse/non-recourse) factoring and reverse factoring showing when these post-shipment financing schemes should be adopted and who really benefits from the adoption. We find recourse factoring is preferred when the supplier's credit rating is relatively high, while non-recourse factoring is preferred within certain medium range of ratings. Both factoring schemes, if adopted, benefit both the supplier and the retailer, and thus the overall supply chain. Further, we find that reverse factoring may not be always preferred by suppliers compared to recourse and non-recourse factorings. Retailers should only offer reverse factoring to suppliers with low, but above a threshold, to medium credit ratings. The optimally designed reverse factoring program can always increase the retailer's profit, but it may leave the supplier indifferent to current factoring option when followed by an aggressive payment extension. More importantly, contrary to conventional wisdom, our theory implies that reverse factoring could be adopted even when the retailer has no credit rating advantage over the supplier, and could benefit the retailer even without extending payment terms.

Keywords: Supply chain finance, recourse/non-recourse factoring, reverse factoring, accounts receivable, credit rating, credit risk, liquidity risk, payment extension

Suggested Citation

Kouvelis, Panos and Xu, Fasheng, A Supply Chain Theory of Factoring and Reverse Factoring (July 23, 2020). Management Science (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3241484 or http://dx.doi.org/10.2139/ssrn.3241484

Panos Kouvelis

Washington University ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fasheng Xu (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.fashengxu.com

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
446
Abstract Views
2,028
rank
72,182
PlumX Metrics