Reverse Factoring Research Articles

Uncovering the hidden roots: the tapestry of working capital efficiency in Indian MSMEs

PurposeWorking capital efficiency (WCE) is crucial for the sustainability of both large and small firms. This study aims to use the sample of micro, small and medium-sized enterprises (MSMEs) in India and tries to understand the critical determinants of WCE.Design/methodology/approachUsing a fixed effect panel data model on a sample of 578 MSMEs (59 micro, 226 medium and 296 small firms), this study explores the relationship between the predictors of WCE. Additionally, the study adopted two metrics for measuring WCE among each type of firm (micro, small and medium).FindingsSeveral firm-specific variables, including leverage (lever), firm age (AGE), firm size (Fsiz), profitability (Prof), extended payment terms (EPT), human capital (HCap), asset turnover ratio (ATR), reverse factoring (RF) and firm growth (FG), have a significant effect on working capital management efficiency (WCE). In contrast, tangibility (Tangib) and salary expenses (Sal) had an insignificant effect on working capital management efficiency.Research limitations/implicationsThe study is based on secondary data. Future studies may incorporate some primary data, which will facilitate qualitative analysis.Originality/valueThe studies explore the relationship between WCE and expenses in HCap, EPT, RF and Sal as the predictors for WCE, which was not studied earlier in MSMEs scenario, especially in case of developing nation.

Collaborative financing and supply chain coordination for corporate social responsibility

Recent research in supply chain (SC) management shows that collaborative financing and coordination can separately improve the SC's corporate social responsibility (CSR). This article examines how reverse factoring (RF) and cost-sharing (CS) contracts initiated by sizable creditworthy retailers interact and can help SCs address various challenges posed by CSR, especially for small- and medium-sized suppliers with limited working capital. RF can simultaneously lead to greater CSR effort and higher profits for all SC members compared to traditional bank financing. We highlight, nevertheless, how some factors, such as market demand uncertainty, the interest rate premia charged by the respective banks, and the supplier's or retailer's bankruptcy risks, determine the adoption and the benefits of the financing devices. Our managerial implications indicate that combining collaborative financing and coordination can simultaneously be profitable for all members of the SC and incentivize the supplier to raise the CSR efforts. Specifically, a CS contract associated with an appropriate financing mechanism can help to improve CSR and the SC's profitability.

The joint effects of lead time, information sharing, and the accounts receivable period on reverse factoring

PurposeThe purpose of this paper is to empirically investigate the joint effects of lead time, information sharing and the accounts receivable period on reverse factoring (RF) adoption from the suppliers’ perspective.Design/methodology/approachSupported by one of the largest commercial banks in China, survey data are collected from 424 Chinese manufacturing firms and analyzed using regression methods.FindingsThe results suggest that lead time positively affects suppliers’ RF adoption directly and indirectly through the accounts receivable period. Meanwhile, information sharing has a positive, direct and a negative, indirect influence on suppliers’ RF adoption.Originality/valueThe findings give suppliers and financial institutions a better understanding of how to leverage the benefits of RF.

The impact of financing mechanism on supply chain sustainability and efficiency

With the growing importance of sustainability for firms to gain a competitive advantage, an increasing number of companies have adopted various mechanisms to achieve their sustainability goals. Some firms have begun to adopt financing mechanisms to encourage the sustainability practice of their suppliers and to improve their supply chain efficiency with a different payment term. We consider two financing mechanisms based on practice, namely, the retailer's advanced payment (AP) model in which the downstream retailer makes an early payment to the upstream supplier within a certain payment term, and the reverse factoring (RF) model in which the downstream retailer cooperates with and encourages a bank to offer a loan to the upstream supplier. To illustrate how these mechanisms improve sustainable development and supply chain efficiency, we develop a model that explicitly captures the impact of payment on the sustainability efforts of suppliers in a supply chain and explores the conditions under which each financing mechanism benefits the players. We describe the equilibrium strategies between the supplier and retailer in each financing mechanism, compare the preferences of each player between the AF and RF models, and find a Pareto zone of a reverse factoring financing plan in which all players prefer model RF over model AP. We also conduct some numerical experiments to show how the payment ratio and payment term of model RF affect supply chain sustainability and efficiency.

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

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.