Supplier's capacity investment strategy with factoring finance

Abstract

Sufficient cash flow and an appropriate capital structure are foundational for the smooth operations of firms. Factoring finance provides an efficient solution for suppliers to fill capital gaps and ensure normal production. Factoring can be provided through either external or internal finance, which are both examined in this study, via factor-led factoring or retailer-led factoring. This study discusses the value of factoring finance to supply chain participants who exhibit loss aversion. Using a game-theoretic approach and equilibrium analysis, we find in each of the factoring schemes that the supplier may choose one of the three following strategies: Strategy N with no liability; Strategy P with partial liability; and Strategy F with full liability. This choice depends primarily on the financing rate and the supplier's degree of loss aversion. The choice among these strategies also affects the relationship between the retailer's order quantity and the supplier's capacity investment. We find that suppliers with low loss aversion prefer retailer-led factoring and that suppliers with high loss aversion have more incentives to adopt factor-led factoring. The loss-averse supplier is more likely to implement Strategy F under retailer-led factoring than under factor-led factoring. The loss-averse supplier tends to invest more capacity under factor-led factoring than under retailer-led finance, while the opposite is the case for the loss-neutral supplier. Our study provides guidelines for supply chain participants in their use of factoring finance to enhance their profits when accounting for both the particular factoring scheme and operational behavior.