Value of Reverse Factoring under Make-to-Order Production Environments

Abstract

Reverse factoring has received significant attention as a means for small and medium-sized firms to access capital. In this monograph, we explain the value creation mechanism of reverse factoring and derive the value of reverse factoring contracts for firms in make-to-order (MTO) production environments. Empirical and other theoretical work on reverse factoring exists in research literature, but our model constitutes the first analytic treatment of the problem for a pure MTO setting. We show how the value of reverse factoring results from and is conditioned by (1) the spread in deadweight external financing costs, (2) payment period extensions, (3) volatility in cash flows, (4) working capital policy, and (5) the risk-free interest rate. Thus, in addition to providing managerial insights on value reverse factoring contracts, our findings disclose an important relation of these elements to the broader macroeconomic context.