Supply chain finance for small and medium sized enterprises: the case of reverse factoring

• Published in: International journal of physical distribution & logistics management 2016-05, Vol.46 (4), p.367-392
• Main Authors: Lekkakos, Spyridon Damianos, Serrano, Alejandro
• Format: Article
• Language: English
• Subjects: Credit ratings; Discount rates; Distribution management & systems; Economic crisis; Financing; Interest rates; International finance; Inventories; Inventory; Liquidity; Logistics; Management science & operations; Mathematical models; Optimization; Policies; Profit margins; Purchase orders; Radio frequency; Replenishment; Securities markets; Small & medium sized enterprises-SME; Small business; Stockpiling; Suppliers; Supply chains; Working capital
• ISSN: 0960-0035; 1758-664X; 0960-0035
• DOI: 10.1108/IJPDLM-07-2014-0165

Purpose – Faced with increasing pressure to meet short-term financing needs, companies are looking for ways to unlock potential funds from within the supply chain. Recently, reverse factoring (RF) has emerged as a financing solution that is initiated by the ordering parties to help their suppliers secure financing of receivables at favorable terms. The purpose of this paper is to study the impact of RF schemes on small and medium enterprises’ operational decisions and performance. Design/methodology/approach – The authors model a supplier’s inventory replenishment problem as a multi-stage dynamic program and derive the supplier’s optimal inventory policy for two cases: no access to external financing; access to external financing through RF or traditional factoring. A number of numerical experiments assesses the supplier’s operational performance. Findings – A working capital-dependent base-stock policy is optimal. The optimal policy specifies the sell-up-to-level of accounts receivable with regard to their maturity. RF considerably improves a supplier’s operational performance while providing the potential to unlock more than 10 percent of the supplier’s working capital. When RF is associated with credit-term extension and the supplier has access to alternative sources of financing, the value of RF is then lower than intuitively expected unless the interest spread is considerably large. Originality/value – This is the first attempt to analytically study the impact of RF in a stochastic multi-period setting.