Guarantee Mechanism in Accounts Receivable Financing with Demand Uncertainty

Abstract

With respect to a two-echelon supply chain comprised of a retailer and a capital-constrained supplier, this paper investigates the effect of guarantee on accounts receivable financing with the consideration of retailer’s default risk and three guarantee scenarios: no guarantee, third-party offers partial credit guarantee (PCG), and supply chain management company (SCMC) offers repurchase guarantee. By a Stackelberg game model, the study finds that: when the third-party offer PCG, the retailer that bears the guarantee fee is more beneficial than when the supplier bears the guarantee fee. The supplier’s profit still increases with the PCG coefficient even when the supplier bears the guarantee fee. In addition, when SCMC offers a repurchase guarantee, the optimal interest with which the bank provides financing to SCMC is unaffected by the retailer’s default and can reduce the optimal interest with which SCMC provides financing to the supplier. From the perspective of the capital-constrained supplier, the study finds that the optimal guarantee mechanism in accounts receivable financing could switch from SCMC offers repurchase guarantee to retailer offers PCG or third-party offers PCG where the retailer bears the guarantee fee with the increase in the PCG coefficient. Finally, some numerical experiments are conducted to verify the results of this research. The findings in this paper can offer financing insights into the guarantee mechanism in accounts receivable financing.