Abstract
This article studies the effects of reverse factoring in a supply chain when the buyer company facilitates its lower short-term borrowing rates to the supplier corporation in return for extended payment terms. We explore the role of interest rate changes, rating changes, and the business cycle position on the cost and benefit trade-off from a supplier perspective. We utilize a combined empirical approach consisting of an event study in Step 1 and a simulation model in Step 2. The event study identifies the quantitative magnitude of central bank decisions and rating changes on the interest rate differential. The simulation computes with a rolling-window methodology the daily cost and benefits of reverse factoring from 2010 to 2018 under the assumption of the efficient market hypothesis. Our major finding is that changes of crucial financial variables such as interest rates, ratings, or news alerts will turn former win–win into win–lose situations for the supplier contingent to the business cycle. Overall, our results exhibit sophisticated trade-offs under reverse factoring and consequently require a careful evaluation in managerial decisions.
Highlights
Providing financing to a business partner in a supply chain is a common phenomenon across industries
In order to explain the output, we start with a stylized simulation of raising central bank interest rates by 100 basis points
The buyer demands a payment term extension from 60 days to 90 or 120 days in order to obtain an equal benefit by a reverse factoring contract
Summary
Providing financing to a business partner in a supply chain is a common phenomenon across industries. Providing trade credit downstream from the supplier to the customer is being widely used for enabling sales and a scope of other motives (Balzenko and Vandezande 2003; Seifert et al 2013; Lam and Zhan 2021). Providing credit to a business partner implies risks and cost. The larger the trade credit provided by own suppliers, the lower the capital burdens and the respective marginal interest-bearing cost. The difference between short-term assets and the trade credit from one’s own suppliers is defined as net working capital (NWC). The net working capital of a customer is reduced if the trade credit by a supplier is increased within the supply chain
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