Option matters: valuing reverse factoring

摘要

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.