The optimal factoring type with partial credit guarantee in the textile industry: disclosed or undisclosed

Abstract

Small and medium-sized textile enterprises generally experience financial difficulties, with a high default risk because of the textile industry’s characteristics of low concentration, long industrial chains, and large seasonal fluctuations. Using a two-echelon supply chain model of the textile industry comprising a core retailer and capital-constrained supplier, this study investigates disclosed and undisclosed factoring while considering the default risk of both the supplier and retailer under two guarantee mechanisms: no guarantee and a third-party partial credit guarantee. Utilizing a Stackelberg game model, this study finds that both the default risk and financial institutions’ loan-to-value ratio for accounts receivable significantly affect optimal financing decisions and financing efficiency. First, excessively pursuing higher loan-to-value ratios lowers financing efficiency. In addition, a partial credit guarantee from a third party can effectively reduce the financing interest rate but cannot improve financing efficiency if the supplier assumes the guarantee fee. Thus, while introducing a guarantee mechanism to control financing risk, financial institutions should consider supply chain participants, rather than the supplier, to assume the guarantee fees. Furthermore, both the supplier and retailer should finance through disclosed factoring regardless of a guarantee. Our findings offer textile industry-specific financing insights regarding the options of guarantee and factoring financing type based on the accounts receivable.