Optimal financing mode selection for a capital-constrained retailer under an implicit bankruptcy cost

Abstract

In the context of the capital-constrained newsvendor problem under an implicit bankruptcy cost, we explore how such a cost affects a capital-constrained retailer’s financing mode selection decision between bank credit financing (BCF) and trade credit financing (TCF). We first study the problem in a single credit channel where the retailer can choose only one of the two financing modes. We find that the retailer prefers TCF to BCF only when the TCF interest rate (TCF-IR) is lower than a threshold, and the “dominant area” of TCF expands with increasing bankruptcy cost. We then study the problem in a dual credit channel where the retailer can choose a portfolio comprising BCF and TCF, and examine two repayment sequences, i.e., repaying BCF first, and vice versa. We propose two approaches to solve the problems. We find that if BCF is repaid first, as the TCF-IR increases from zero, the retailer first chooses only TCF, then a portfolio comprising BCF and TCF, and finally only BCF. On the other hand, if TCF is repaid first, the retailer always chooses the single credit channel (BCF or TCF) if the TCF-IR is not greater than a threshold or the bankruptcy cost is higher than a threshold; otherwise, a portfolio comprising BCF and TCF, or only BCF. Finally, we conduct numerical experiments to verify our main theoretical findings and examine the effects of the retailer’s internal capital endowment on its financing mode selection decision, showing that a wealthier retailer is more likely to prefer BCF to TCF.