Trade Credit and Buyer Financing

Abstract

This study investigates trade credit and early payment financing in a three-party supply chain consisting of a manufacturer, a capital-constrained distributor, and a retail platform. The manufacturer or the platform provides the financing service to the distributor. Two different leadership structures are investigated, namely, platform and manufacturer leadership Stackelberg game, where the platform or manufacturer first makes the decision, respectively. Under trade credit financing, the manufacturer and the whole supply chain face loss when the commission rate increases. However, under buyer financing, they benefit from the high commission rate. Under platform leadership, the distributor, the manufacturer, and the supply chain perform better with trade credit if and only if the commission rate is small or the production cost is high, while the platform always prefers buyer financing. Under manufacturer leadership, the distributor, manufacturer, and supply chain perform better with trade credit under low production cost and commission rate. The platform prefers trade credit when production cost is in the intermediate range. By further analyzing the case that both financing channels are available and the distributor decides which one to choose, we find that the financing services competition hurts only the platform’s profits. And under certain conditions, trade credit and early payment can achieve the same performance for every supply chain member. These findings enhance our understanding of the supply chain risk allocation efficiency of trade credit and early payment financing under different leadership structures. Neither risk allocation form outperforms the other, and the relative efficiency depends on supply chain characteristics.

Keywords

Supply chain finance / supply chain risk allocation / payment term / game theory

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