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Option matters: valuing reverse factoring

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  • Robert Grüter
  • David A. Wuttke

Abstract

The value of reverse factoring consists of interest arbitrage and the potential option to enable production. We provide closed-form expressions for both components, building on financial theory and a stochastic model of liquidity needs. We characterise industries in terms of growth and volatility to identify supply chains that benefit most from adopting reverse factoring. Our results suggest how buyers should introduce reverse factoring to their supply chain to maximise their profit. Besides contributing to the understanding of reverse factoring, we provide managers with both an exact formula and an approximate rule to assess their value of reverse factoring. Our analytic and numerical results also indicate that, in many but not all cases, buyers should ask for payment term extensions rather than price reductions to obtain direct benefits from reverse factoring.

Suggested Citation

  • Robert Grüter & David A. Wuttke, 2017. "Option matters: valuing reverse factoring," International Journal of Production Research, Taylor & Francis Journals, vol. 55(22), pages 6608-6623, November.
    • Handle: RePEc:taf:tprsxx:v:55:y:2017:i:22:p:6608-6623
    DOI: 10.1080/00207543.2017.1330564
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    Cited by:

    1. Hans-Martin Beyer & Bodo Herzog, 2021. "Supply Chain Finance: Cost–Benefit Differentials under Reverse Factoring with Extended Payment Terms," IJFS, MDPI, vol. 9(4), pages 1-17, October.
    2. Zericho R Marak & Deepa Pillai, 2018. "Factors, Outcome, and the Solutions of Supply Chain Finance: Review and the Future Directions," JRFM, MDPI, vol. 12(1), pages 1-23, December.
    3. Yoo, Seung Ho & Choi, Thomas Y. & Kim, DaeSoo, 2021. "Integrating sourcing and financing strategies in multi-tier supply chain management," International Journal of Production Economics, Elsevier, vol. 234(C).
    4. Wu, Yaobin & Wang, Yingying & Xu, Xun & Chen, Xiangfeng, 2019. "Collect payment early, late, or through a third party's reverse factoring in a supply chain," International Journal of Production Economics, Elsevier, vol. 218(C), pages 245-259.
    5. Ratri Parida & Manoj Kumar Dash & Anil Kumar & Edmundas Kazimieras Zavadskas & Sunil Luthra & Eyob Mulat‐weldemeskel, 2022. "Evolution of supply chain finance: A comprehensive review and proposed research directions with network clustering analysis," Sustainable Development, John Wiley & Sons, Ltd., vol. 30(5), pages 1343-1369, October.
    6. Daehyeon Park & Doojin Ryu, 2023. "E‐commerce retail and reverse factoring: A newsvendor approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 416-423, January.
    7. Liu, Bai & Ju, Tao & Chan, Hing Kai, 2022. "The diverse impact of heterogeneous customer characteristics on supply chain finance: Empirical evidence from Chinese factoring," International Journal of Production Economics, Elsevier, vol. 243(C).
    8. Jena, Sarat Kumar & Padhi, Sidhartha S & Cheng, T.C.E., 2023. "Optimal selection of supply chain financing programmes for a financially distressed manufacturer," European Journal of Operational Research, Elsevier, vol. 306(1), pages 457-477.

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