Financing mode decision in a supply chain with financial constraint

Abstract

Small and medium sized enterprises (SMEs) often have challenges to obtain bank financing for their operations, due to strict risk control of banks and low credit rating of SMEs. In recent years supply chain finance (SCF) has become promising solutions to alleviate SMEs' financing problem, which takes advantage of supply chain integrity and relies on core enterprises to promote SMEs' financing. In this paper, by taking the risk of financing participants into account, we set up a framework of SCF based on a general supply chain contract. We discuss the equilibrium strategies under three financing modes respectively and the bank's decision-making, thereafter we analyze the financing mode decision under the general financing framework. We show that the wholesale price decision is related to the initial working capital of the retailer. Also, the critical initial working capital is affected by demand distribution, supply chain contract and interest rate. Moreover, reasonable wholesale price can eliminate SCF risk and guide the retailer's ordering and the bank's interest rate decision. Finally, the efficient working capital management can help the retailer to select reasonable financing mode, and all three financing modes have their own applicability.