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

K. Vliet van der, M.J. Reindorp, J.C. Fransoo

Research output: Contribution to journalArticleScientificpeer-review

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 optimization. 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 needs careful assessment in stochastic settings.
Original languageEnglish
Pages (from-to)842-853
Number of pages12
JournalEuropean Journal of Operational Research
Volume242
Issue number3
DOIs
Publication statusPublished - 2015

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