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

Keywords

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

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