Matthew Reindorp

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

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.

Market adoption of reverse factoring

Purpose – The purpose of this paper is to show that market dynamics can significantly influence the lifecycle and value of a supply chain finance (SCF) arrangement. Design/methodology/approach – Based on a review of scientific and trade literature, the authors construct a model of market dynamics for reverse factoring, a specific type of SCF arrangement. The authors assume that firms’ participation in a reverse factoring arrangement is determined by the direct benefits they can derive from it. The authors analyse the model by means of simulation in system dynamics. Findings – The authors identify the following market factors as key for direct benefits: competition, interest rates, receivables volumes, and firms’ working capital goals. The authors find that reverse factoring can yield direct benefits for all supply chain participants, but that these benefits are highly sensitive to market conditions. Research limitations/implications – The model is stylized, but this study shows the need for further resear...

Capital renewal as a real option

We consider the timing of replacement of obsolete subsystems within an extensive, complex infrastructure. Such replacement action, known as capital renewal, must balance uncertainty about future profitability against uncertainty about future renewal costs. Treating renewal investments as real options, we derive an optimal solution to the infinite horizon version of this problem and determine the total present value of an institutions capital renewal options. We investigate the sensitivity of the infinite horizon solution to variations in key problem parameters and highlight the system scenarios in which timely renewal activity is most profitable. For finite horizon renewal planning, we show that our solution performs better than a policy of constant periodic renewals if more than two renewal cycles are completed.

Reverse Factoring for SME Finance

We present a mathematical model for integration, analysis, and optimization of operational and financial processes within a supply chain. Specifically, we consider commercial transactions of a large corporate customer with a small or medium-sized supplier. We show how application of reverse factoring influences the operational and financial decisions of these firms. While some empirical work on reverse factoring exists within research literature, our model constitutes the first analytic treatment of the problem, using the value framework of financial theory. We show how the value of reverse factoring results from, and is conditioned by (1) the spread in external financing costs, (2) the operating characteristics of the supplier, including the implied working capital policy, and (3) the risk-free interest rate. Thus, in addition to providing managerial insights that integrate operational and financial perspectives, our findings disclose an important relation of these elements to the broader macro-economic context.

Purchase Order Financing: Credit, Commitment, and Supply Chain Consequences

We study a supply chain where a retailer buys from a supplier who cannot fully �?nance her production. Informational problems about the supplier’s demand prospects and production capabilities restrict her access to capital. By committing to a minimum purchase quantity, the retailer can mitigate these informational problems and expand the supplier’s feasible production set. We assume a newsvendor model of operations and analyze the strategic interaction of the two parties as a sequential game. Key parameters in our model are the supplier’s ex-ante credit limit; her informational transparency (which conditions the amount of additional capital released by the commitment); and the demand characteristics of the �?nal market. We show that in equilibrium the supplier can benefit from a lower ex-ante credit limit or lower informational transparency. The retailer always benefits from an increase in these parameters. Moreover, the supplier’s ex-ante credit limit and informational transparency may be substitutes or complements with respect to her own pro�?t, but are always substitutes with respect to the retailer’s pro�?t. Our study provides a novel perspective on capital market frictions in supply chain contracting.

Purchase Order Finance: A Conceptual Model with Economic Insights

Purchase Order (PO) finance is a form of financial intermediation which can alleviate capital constraints in certain supply chains. PO finance is typically utilized by small and medium-sized enterprises (SMEs) that operate as importers, exporters, wholesalers, or distributors and have high sales growth. When applicable, PO finance creates value for the supply chain by providing capital that is not available through regular lending channels, due to informational problems. We provide a conceptual model that clarifies the value proposition of PO finance and describe how the transactions are carried out in practice. The conceptual model allows us to highlight the settings where economic conditions will favor the application of PO finance.