Seller-Orchestrated Inventory Financing under Bank Capital Regulation

36 Pages Posted: 7 Jun 2019 Last revised: 30 Nov 2023

See all articles by Yuxuan Zhang

Yuxuan Zhang

University of International Business and Economics

Simin Huang

Tsinghua University

S. Alex Yang

London Business School

Date Written: April 13, 2022


To help small firms secure bank financing, large sellers often orchestrate joint finance programs, linking their small dealers with major banks that lend to all participating dealers based on the information the seller provides. We examine supply chain decisions (pricing and inventory) and lending terms under such seller-orchestrated financing programs. In loan pricing, we highlight a form of financial friction that is of particular importance under such schemes—bank capital regulation. Banks are globally mandated to maintain regulatory capital to mitigate unforeseen loan losses, using either the standardized approach (where regulatory capital is a fixed percentage of the loan amount) or the internal rating-based (IRB) approach (where it depends on the loan’s Value-at-Risk). We consider a game-theoretic model consisting of a large seller and multiple capital-constrained newsvendor-type dealers, who obtain financing from banks who are subject to capital regulation. The seller decides the wholesale price and whether to orchestrate a joint finance program for its dealers by collaborating with a bank, and the dealers choose their inventory level and the financing channel. We find that a seller should only orchestrate the joint financing program when the bank adopts the IRB approach and the dealers are of low risk. Such a program is more profitable to the seller when the demand correlation among dealers is low, and there is a large number of dealers. Although always
benefiting the seller, these programs may hurt dealers with intermediate risk. Facing dealers with varying financial situations, the terms under the joint finance program should be designed as if the financially strong dealers subsidize the weak ones. Finally, allowing the seller to share part of the loan loss could further enhance the performance of joint financing, but only when the seller’s opportunity cost of capital is low. Our findings provide guidance to large sellers on how to orchestrate joint finance schemes, and to small dealers on making their corresponding operational decisions.

Keywords: supply chain management, inventory, operations-finance interface, bank capital regulation, joint finance program, seller-orchestrated financing, risk pooling

Suggested Citation

Zhang, Yuxuan and Huang, Simin and Yang, S. Alex, Seller-Orchestrated Inventory Financing under Bank Capital Regulation (April 13, 2022). Available at SSRN: or

Yuxuan Zhang

University of International Business and Economics ( email )

Beijing, 100191

Simin Huang

Tsinghua University ( email )

Beijing, 100084

S. Alex Yang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom


Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics