Supply chain finance for small and medium sized enterprises: the case of reverse factoring

Abstract

Purpose Faced with increasing pressure to meet short-term financing needs, companies are looking for ways to unlock potential funds from within the supply chain. Recently, reverse factoring (RF) has emerged as a financing solution that is initiated by the ordering parties to help their suppliers secure financing of receivables at favorable terms. This paper studies the impact of RF schemes on SMEs’ operational decisions and performance. Design/methodology/approach We model a supplier’s inventory replenishment problem as a multi-stage dynamic program and derive the supplier’s optimal inventory policy for two cases: 1) no access to external financing; 2) access to external financing through RF or traditional factoring (TF). A number of numerical experiments assesses the supplier’s operational performance. Findings A working capital-dependent base-stock policy is optimal. The optimal policy specifies the sell-up-to level of accounts receivable with regard to their maturity. RF considerably improves a supplier’s operational performance while providing the potential to unlock more than 10% of the supplier’s working capital. When RF is associated with credit term extension and the supplier has access to alternative sources of financing, the value of RF is then lower than intuitively expected unless the interest spread is considerably large. Originality/value This is the first attempt to analytically study the impact of RF in a stochastic multi-period setting.