Buyer-backed Purchase-order Financing For Supplier Facing Yield Uncertainty

Richa Jain, M.J. Reindorp, Arun Chockalingam

Research output: Working paperOther research output

Abstract

Adequate access to working capital is often a challenge for SMEs. Schemes such as factoring and reverse-factoring offer a solution on the post-shipment side of the financing cycle. We consider the pre-shipment side of the cycle: provision of capital through purchase order financing. In our model, the explicit obstacle to financing is the risk that the SME supplier will experience a yield shortfall. We investigate the possibility the customer of an SME may offer 'buyer-backing'
for purchase order financing, i.e., a sharing of the risk faced by an external provider of capital. The customer's operational and financial decisions must ensure economical feasibility for the supplier as well as for the provider of capital. We establish that provision of buyer-backing creates value for customer and supplier in terms of financial gains and ability to continue business. Through numerical analysis, we quantify the risk created by buyer-backing and identify
a mitigation strategy.
Original languageEnglish
Publication statusIn preparation - 2019

Fingerprint

Uncertainty
Financing
Purchase
Buyers
Suppliers
Small and medium-sized enterprises
Factoring
Mitigation
Numerical analysis
Financial decisions
Working capital

Keywords

  • Purchase-order finance
  • buyer-backing
  • variable contract price
  • uncertain yield
  • supply chain
  • stochastic model

Cite this

@techreport{cb8024cfe2b14fc5859a7620afb0b772,
title = "Buyer-backed Purchase-order Financing For Supplier Facing Yield Uncertainty",
abstract = "Adequate access to working capital is often a challenge for SMEs. Schemes such as factoring and reverse-factoring offer a solution on the post-shipment side of the financing cycle. We consider the pre-shipment side of the cycle: provision of capital through purchase order financing. In our model, the explicit obstacle to financing is the risk that the SME supplier will experience a yield shortfall. We investigate the possibility the customer of an SME may offer 'buyer-backing'for purchase order financing, i.e., a sharing of the risk faced by an external provider of capital. The customer's operational and financial decisions must ensure economical feasibility for the supplier as well as for the provider of capital. We establish that provision of buyer-backing creates value for customer and supplier in terms of financial gains and ability to continue business. Through numerical analysis, we quantify the risk created by buyer-backing and identifya mitigation strategy.",
keywords = "Purchase-order fi nance, buyer-backing, variable contract price, uncertain yield, supply chain, stochastic model",
author = "Richa Jain and M.J. Reindorp and Arun Chockalingam",
year = "2019",
language = "English",
type = "WorkingPaper",

}

Buyer-backed Purchase-order Financing For Supplier Facing Yield Uncertainty. / Jain, Richa; Reindorp, M.J.; Chockalingam, Arun.

2019.

Research output: Working paperOther research output

TY - UNPB

T1 - Buyer-backed Purchase-order Financing For Supplier Facing Yield Uncertainty

AU - Jain, Richa

AU - Reindorp, M.J.

AU - Chockalingam, Arun

PY - 2019

Y1 - 2019

N2 - Adequate access to working capital is often a challenge for SMEs. Schemes such as factoring and reverse-factoring offer a solution on the post-shipment side of the financing cycle. We consider the pre-shipment side of the cycle: provision of capital through purchase order financing. In our model, the explicit obstacle to financing is the risk that the SME supplier will experience a yield shortfall. We investigate the possibility the customer of an SME may offer 'buyer-backing'for purchase order financing, i.e., a sharing of the risk faced by an external provider of capital. The customer's operational and financial decisions must ensure economical feasibility for the supplier as well as for the provider of capital. We establish that provision of buyer-backing creates value for customer and supplier in terms of financial gains and ability to continue business. Through numerical analysis, we quantify the risk created by buyer-backing and identifya mitigation strategy.

AB - Adequate access to working capital is often a challenge for SMEs. Schemes such as factoring and reverse-factoring offer a solution on the post-shipment side of the financing cycle. We consider the pre-shipment side of the cycle: provision of capital through purchase order financing. In our model, the explicit obstacle to financing is the risk that the SME supplier will experience a yield shortfall. We investigate the possibility the customer of an SME may offer 'buyer-backing'for purchase order financing, i.e., a sharing of the risk faced by an external provider of capital. The customer's operational and financial decisions must ensure economical feasibility for the supplier as well as for the provider of capital. We establish that provision of buyer-backing creates value for customer and supplier in terms of financial gains and ability to continue business. Through numerical analysis, we quantify the risk created by buyer-backing and identifya mitigation strategy.

KW - Purchase-order finance

KW - buyer-backing

KW - variable contract price

KW - uncertain yield

KW - supply chain

KW - stochastic model

M3 - Working paper

BT - Buyer-backed Purchase-order Financing For Supplier Facing Yield Uncertainty

ER -