The price of reverse factoring: Financing rates vs. payment delays

Kasper van der Vliet, Matthew J. Reindorp and Jan C. Fransoo

European Journal of Operational Research, 2015, vol. 242, issue 3, 842-853

Abstract: Reverse factoring—a financial arrangement where a corporation facilitates early payment of its trade credit obligations to suppliers—is increasingly popular in industry. Many firms use the scheme to induce their suppliers to grant them more lenient payment terms. By means of a periodic review base stock model that includes alternative sources of financing, we explore the following question: what extensions of payment terms allow the supplier to benefit from reverse factoring? We obtain solutions by means of simulation optimisation. We find that an extension of payment terms induces a non-linear financing cost for the supplier, beyond the opportunity cost of carrying additional receivables. Furthermore, we find that the size of the payment term extension that a supplier can accommodate depends on demand uncertainty and the cost structure of the supplier. Overall, our results show that the financial implications of an extension of payment terms need careful assessment in stochastic settings.

Keywords: Supply chain management; Supply chain finance; Reverse factoring; Payment delays; Simulation (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:242:y:2015:i:3:p:842-853

DOI: 10.1016/j.ejor.2014.10.052

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