Supply Chain Finance: Cost–Benefit Differentials under Reverse Factoring with Extended Payment Terms

Abstract

This article studies the effects of reverse factoring in a supply chain when the buyer company facilitates its lower short-term borrowing rates to the supplier corporation in return for extended payment terms. We explore the role of interest rate changes, rating changes, and the business cycle position on the cost and benefit trade-off from a supplier perspective. We utilize a combined empirical approach consisting of an event study in Step 1 and a simulation model in Step 2. The event study identifies the quantitative magnitude of central bank decisions and rating changes on the interest rate differential. The simulation computes with a rolling-window methodology the daily cost and benefits of reverse factoring from 2010 to 2018 under the assumption of the efficient market hypothesis. Our major finding is that changes of crucial financial variables such as interest rates, ratings, or news alerts will turn former win–win into win–lose situations for the supplier contingent to the business cycle. Overall, our results exhibit sophisticated trade-offs under reverse factoring and consequently require a careful evaluation in managerial decisions.

Uncovering the hidden roots: the tapestry of working capital efficiency in Indian MSMEs

“…This allows them to conserve cash and invest in the business or pay for other operational expenses. Multiple studies have demonstrated the effectiveness of longer payment periods for WCM (Beyer and Herzog, 2021), for instance, discovered that prolonged payment periods might Additionally, extended payment periods might assist SMEs in strengthening their ties with their suppliers. This may improve the parties' engagement, interaction and coordination.…”