The price of reverse factoring: Financing rates vs. payment delays

•We explore the interaction between payment terms and financing in a stochastic setting.•Financing costs increase non-linearly when payment terms are extended.•The cost of a payment term extension depends on operational characteristics. Reverse factoring—a financial arrangement where a corporation f...

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Bibliographic Details
Published in:European journal of operational research 2015-05, Vol.242 (3), p.842-853
Main Authors: van der Vliet, Kasper, Reindorp, Matthew J., Fransoo, Jan C.
Format: Article
Language:English
Subjects:
Assessments
Computer simulation
Cost structure
Delay
Financing
Liabilities
Operational research
Operations research
Optimization
Payment delays
Payment systems
Raw materials
Reverse factoring
Simulation
Studies
Suppliers
Supply chain finance
Supply chain management
Trade finance
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Summary:•We explore the interaction between payment terms and financing in a stochastic setting.•Financing costs increase non-linearly when payment terms are extended.•The cost of a payment term extension depends on operational characteristics. Reverse factoring—a financial arrangement where a corporation facilitates early payment of its trade credit obligations to suppliers—is increasingly popular in industry. Many firms use the scheme to induce their suppliers to grant them more lenient payment terms. By means of a periodic review base stock model that includes alternative sources of financing, we explore the following question: what extensions of payment terms allow the supplier to benefit from reverse factoring? We obtain solutions by means of simulation optimisation. We find that an extension of payment terms induces a non-linear financing cost for the supplier, beyond the opportunity cost of carrying additional receivables. Furthermore, we find that the size of the payment term extension that a supplier can accommodate depends on demand uncertainty and the cost structure of the supplier. Overall, our results show that the financial implications of an extension of payment terms need careful assessment in stochastic settings.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2014.10.052