Supplier Finance Research Articles

Does Integrated Report Quality Matter for Supplier Financing?

ABSTRACT This study examines the relationship between integrated report quality (IRQ) and supplier financing using 603 firm-year observations from firms listed on the Johannesburg Stock Exchange (JSE) between 2011 and 2021. We find that IRQ has a positive association with supplier financing, indicating that firms with higher IRQ are more likely to attract increased supplier finance. This positive IRQ-supplier financing relationship is further intensified by lower information asymmetry, implying that firms’ information environment plays a pivotal role. Mediation analysis indicates that information asymmetry and creditworthiness serve as underlying channels through which IRQ affects supplier financing. The IRQ-supplier financing interaction is also found to increase firms’ value. The study’s findings are crucial for stakeholders, such as report preparers, regulators, policymakers, the IIRC, IASB, ISSB, and JSE. These findings highlight IRQ’s importance in enhancing supplier finance and indicate further steps to enhance IRQ for fostering financial stability and sustainable development worldwide. Data Availability: All data are publicly available from the sources mentioned in the paper. JEL Classifications: G32; M41; M42.

Supplier Finance and Participation Banking Application in Türkiye

Tedarikçi finansmanı, özellikle KOBİ niteliğindeki firmalar için yeni bir çözüm önermektedir. Kriz dönemlerinde daha da ciddileşen krediye ulaşım sorunu, nakit yönetimi ve tedarik zincirlerinin bozulması konularında olumlu bir yaklaşımı olan bu enstrüman, İslami finans uygulayıcısı olan Katılım Bankaları için de yeni bir alan açmakta ve kurumsal müşteriler için katılım finansı prensiplerine uygun bir çözüm önermektedir. Dünya’da “Supplier Chain Finance” olarak ifade edilen bu enstrüman özellikle nakit akışı ve finans yönetimi açısından son yıllarda önem arz etmektedir. Bu ürünün çok yakın zamanda katılım finans sistemine dâhil olması nedeni ile yapılan akademik çalışmaların sayısı oldukça sınırlıdır. Tedarikçi finansmanının KOBİ’lerin kısa vadede yapabilecekleri finansal planlama ve değer oluşturma süreçlerinin ve verimliliklerinin artmasına katkıda bulunması beklenmektedir. Katılım finansı prensipleri çerçevesinde ihtiyaç duyulan ticari işlemlerin gerçekleştirilebilmesi başta faiz hassasiyeti olmak üzere katılım finansı hassasiyeti olan firmalar için yeni bir kapı açmıştır. Çalışmamızın amacı, katılım bankacılığı uygulaması ile birlikte tedarikçi finansmanı enstrümanının KOBİ’lere olan finansal ve operasyonel faydalarını açıklamaktır. KOBİ’lerin ödeme periyodu sürelerine olan etkisini ve uzun vadeli, stratejik faydaları gibi konular ise bu çalışmanın dışında tutulmuştur.

Does strategic deviation influence firms’ use of supplier finance?

We investigate how strategic deviation, capturing the extent to which firms’ resource allocations or commitments deviate from those of industry peers, affects trade credit policy. We find that it increases firms’ use of supplier-provided trade credit. This finding is noticeably more pronounced among firms exhibiting higher information asymmetry but perceptibly weaker among firms with fewer financing constraints and stronger corporate governance attributes. Our analysis also reveals that strategically deviant firms borrow less from banks and that the use of more trade credit by strategically deviant firms is associated with higher market valuation. Our results are robust and highlight that strategic deviation has important implications for corporate trade credit policy.

Buyer guarantee and bailout in supplier finance with bankruptcy cost

In this paper, we analyze an endogenous determination of a credit guarantee provided by a downstream buyer to a capital-constrained supplier to help the latter access a bank loan. Specifically, the capital-constrained supplier, who relies on bank loans to finance its production, sells a product to the buyer during a single selling season. When offering a purchase contract to the supplier, the buyer has the option to decide how much to guarantee in the supplier's loan payments. Although buyer-provided credit guarantee secures a required supply quantity and reduces the purchase price paid to the supplier (by lowering the supplier's financing costs), it results in financial losses for the buyer when the supplier's realized revenue is not sufficient for repaying the loan. Hence, there exists a tradeoff between the value and cost in designing an appropriate credit guarantee scheme. We explicitly characterize the optimal credit guarantee policy and identify the conditions under which full guarantee is optimal. Furthermore, we show that bankruptcy cost plays a critical role in the impact of the supplier's wealth on the buyer's profit. The buyer is better off working with a less wealthy supplier if there is no bankruptcy cost, but this may not be the case when the bankruptcy cost is high. With buyer-provided guarantee, the existence of bankruptcy cost may incentivize the buyer to provide (ex post) bailout to rescue a supplier that is prone to bankruptcy. We show that the bailout option improves the buyer's profit, although it does not affect the optimality of implementing a full guarantee policy (ex ante).

Financing the capital-constrained supply chain with loss aversion: Supplier finance vs. supplier investment

This study examines two supply chain financing schemes for the capital-constrained retailer: supplier finance (SF) and supplier investment (SI). SF allows a downstream capital-constrained retailer to pay partially with all the initial working capital, and delays the outstanding balance with a deferred interest rate until the end of the selling season. Under SI, the supplier invests in the capital-constrained retailer’s operations as equity and then obtains a portion of dividends in return. Considering the retailer’s aversion to loss, we comparatively analyze the retailer’s ordering decision and the supplier’s pricing decision under these two schemes. We then investigate the value of each scheme and the participation motivations for both parties. We find that loss aversion influences the participants’ decisions. When the retailer is loss-averse, she will make more conservative order decisions, and the supplier will set a higher wholesale price. The loss-averse retailer will order more under the SI than under the SF. Also, the lower the retailer’s initial working capital, the higher the benefit from pure SF or SI for both supply chain members. In particular, if the retailer is highly capital-constrained, both participants prefer SI to SF. Finally, we explore the financing portfolio of pure SF and SI. Our results show that the supplier can achieve the highest profit when offering the financing portfolio and the retailer may accept this menu.

Buyer Intermediation in Supplier Finance

Small suppliers often face challenges to obtain financing for their operations. Especially in developing economies, traditional financing methods can be very costly or unavailable to such suppliers. To reduce channel costs, large buyers have recently begun implementing their own financing methods that intermediate between suppliers and financing institutions. In this paper, we analyze the role and efficiency of buyer intermediation in supplier financing. Building a game-theoretical model, we show that buyer intermediated financing can significantly improve channel performance, and can simultaneously benefit both supply chain participants. Using data from a large Chinese online retailer and through structural regression estimation, we demonstrate that buyer intermediation lowers interest rates and wholesale prices, increases order fill rates, and boosts supplier borrowing. Based on counterfactual analysis on the data, we predict that the implementation of buyer intermediated financing will improve channel profits by 13.05%, increasing supplier and retailer profits by more than 10% each, and yielding approximately $44 million projected savings for the retailer.The online supplement is available at https://doi.org/10.1287/mnsc.2017.2863 .This paper was accepted by Vishal Gaur, operations management.

Vertical integration and supplier finance

AbstractThis paper studies access to finance by suppliers that are linked to a multinational enterprise. The theoretical framework consists of a property rights model featuring suppliers that are either vertically integrated or sell to the multinational at arm's length, which in turn affects the availability of different sources of credit. Integrated suppliers are predicted to cover a relatively larger share of their costs using internal sources, consisting of initial wealth plus funds from the multinational parent. In addition, due to the diminished dependence on external funds (local bank credit), integrated suppliers' funding shares are less responsive to changes in their home country's level of financial development. We test the model's predictions using firm survey data from over 50 developing and emerging countries and find broad support.

VERTICAL RELATIONS UNDER CREDIT CONSTRAINTS

We model the impact that credit constraints and market risk have on the vertical relationships between firms in the supply chain. Firms which might face credit constraints in future investments become endogenously risk averse when accumulating pledgable assets. In the short run, the optimal supply contract involves risk sharing, so inducing double marginalization. Credit constraints thus result in higher retail prices, and this is true whether the firm is debt or equity funded. Further, we offer a new theory of supplier finance arms as we show an intrinsic complementarity between supply and lending which reduces financing inefficiencies created by informational asymmetries. The model offers: a theory of countervailing power based on credit constraints; a transmission mechanism linking the cost of borrowing with retail prices; and a motive for outsourcing supply (or distribution) in the face of market risk.

Vertical Integration and Supplier Finance

We investigate the financial implications of a multinational firm's choice between outsourcing and integration from the perspective of the supplier. Using a simple model, we explore the extent to which an integrated supplier's access to finance, as well as its sources of funding, change relative to a firm supplying a multinational at arm's-length. The model predicts that integrated firms have better access to finance and cover a larger share of their costs using internal funds. Furthermore, improvements in a host country's level of financial development have less of an impact on the financial situation of integrated suppliers. We present empirical evidence from firm-level data for over 60 countries broadly supporting the predictions.

How Do Firms Choose Between Intermediary and Supplier Finance?

This paper examines firms’ short‐term financing choices between intermediated loans and trade credit. I test two sets of empirical hypotheses: 1) hypotheses concerning the cross‐sectional differences in the level of intermediary finance for firms that use different levels of trade credit and 2) hypotheses concerning the dynamics of trade credit growth. I find strong evidence that for firms with high agency costs, the use of trade credit facilitates access to conventional bank loans. The evidence is consistent with theories based on the signaling role of trade credit provision and suppliers’ liquidation advantage.

Integrating supply chain finance into the payables process

In this paper, readers will gain insight into the benefits of a supply chain financing process where financially strong buyers support the liquidity needs of trading partners within their supply chains. There are several approaches to this system of financing, and readers will learn the pros and cons of extension strategies, a cross-border application and discounting challenges. The paper also discusses the various groups within a business that should be engaged before adopting the process to ensure its success. Accounting concerns and guidelines are also addressed. Finally, adding a supplier finance solution to a company’s payable mix can help to create a stronger balance sheet and a more stable supply chain.

How Do Firms Choose between Intermediary and Supplier Finance?

How Do Firms Choose between Intermediary and Supplier Finance?

How Do Firms Choose between Intermediary and Supplier Finance?

We examine the dynamics of firm's choice of short-term financing between intermediated loans and trade credit. We argue that trade credit facilitates the access to and improves the terms of conventional loans. We model the idea that trade credit is a favorable signal of the creditworthiness of the borrower. Hence, some firms will use trade credit in addition to conventional institutional loans despite its higher cost. Our empirical results support the predictions of the theoretical model we develop. We show that firms with high agency costs rely heavily on supplier financing. For these firms trade credit has a significant positive effect on the level of intermediated borrowing.