Reverse Factoring Versus Prepayment in Supply Chain with Demand Uncertainty and Capital Constraint

Abstract

We examine a supply chain with one small supplier with capital constraint and one retailer with sufficient capital and bargaining power. The supplier does not possess enough credit to get bank loan independently. So when no financing service is viable, the supplier's production quantity is restricted, which will reduce the whole supply chain efficiency. The retailer may help the early production by providing reverse factoring or direct prepayment. When given the choice between the two credit types, the unique equilibrium is reverse factoring when the retailer can reach a high credit term, but is prepayment otherwise. Our analysis further suggests that the equilibrium region of prepayment financing shrinks as the retailer can default on certain proportion of the wholesale contract.