A Supply Chain Theory of Factoring and Reverse Factoring
31 Pages Posted: 12 Sep 2018
Date Written: August 30, 2018
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 credit rating discrepancy between small supplier and large retailer, and enables supplier's factoring at the retailer's rate. We develop a supply chain theory of factoring (recourse and non-recourse) and reverse factoring showing when these post-shipment financing schemes should be adopted and who really benefits from the adoption. Given the supplier's credit rating and the trade credit term, recourse factoring is preferred when the supplier's cash investment return rate is relatively high; non-recourse factoring is preferred within certain medium range; otherwise, factoring should not be adopted. 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 among other short-term financing options (bank loans, recourse and non-recourse factoring). Retailers should only offer reverse factoring to suppliers with low, but above a threshold, to medium cash investment return rates. The optimally designed reverse factoring program can always increase the retailer's profit, but it may leave the supplier indifferent to his current financing option when followed by aggressive payment extension. Interestingly, our results suggest that it is often preferable for the retailer to extend reverse factoring to certain suppliers without any request for payment extension, and leverage the supplier's willingness to carry extra inventory that increases the overall supply chain efficiency.
Keywords: Supply chain finance, recourse and non-recourse factoring, reverse factoring, credit rating, investment return, payment extension
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