Financing Supplier Through Retailer's Credit

43 Pages Posted: 8 Jul 2019

See all articles by Yong Zha

Yong Zha

School of Management, University of Science and Technology of China

Kehong Chen

affiliation not provided to SSRN

Lingxiu Dong

Washington University in St. Louis - John M. Olin Business School

Yugang Yu

University of Science and Technology of China (USTC)

Date Written: July 3, 2019

Abstract

This paper studies retailer-sponsored financing (RSF), an emerging practice of retailers in developing economies to help capital-constrained suppliers obtain external financing for production. Under RSF, the retailer agrees to share the loan-repayment responsibility with the supplier – the retailer is responsible for paying the loan principal, and the supplier is responsible for the loan interest. Without RSF, the supplier, when in need of capital, has to finance her production with bank-direct financing (BDF), under which she is responsible to repay both the loan principal and interest. We show that in an environment where both the supplier and the retailer face exogenous bankruptcy risks, the supplier always prefers RSF to BDF. The retailer, on the other hand, benefits from offering RSF in two cases: (a) when the supplier's bankruptcy-loss factor is low, or (b) when the supplier's bankruptcy-loss factor is relatively high but her need for capital is light. In both cases, RSF causes the supplier to lower her wholesale price and encourages the retailer to increase quantity commitment. Issuing RSF loans benefits the bank by increasing its clientele among suppliers and by increasing the lending business volume. Interestingly, the bankruptcy risks of the supplier and the retailer tend to have the opposite impact on the value of RSF.

Keywords: supplier financing, newsvendor, financing intermediation, retailer-sponsored finance, trade credit

Suggested Citation

Zha, Yong and Chen, Kehong and Dong, Lingxiu and Yu, Yugang, Financing Supplier Through Retailer's Credit (July 3, 2019). Available at SSRN: https://ssrn.com/abstract=3415185 or http://dx.doi.org/10.2139/ssrn.3415185

Yong Zha

School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

Kehong Chen

affiliation not provided to SSRN

Lingxiu Dong (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Yugang Yu

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

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