Decision Analysis of Financing the Capital-Constrained Supplier with Trade Credit Insurance

Factoring is a widely used finance solution for capital-constrained suppliers. To effectively avoid the risk of unpaid debt, incorporating trade credit insurance (TCI) into factoring has gained increasing popularity. Motivated by the practice that both suppliers and factors can act as TCI buyers, this study examines the decision analysis in two TCI schemes, i.e., the supplier-insured TCI (SI) and the factor-insured TCI (FI), on optimal decisions and profits of supply chain participants through game analysis. We find that when the supplier is highly capital constrained, compared with the benchmark without insurance, both SI and FI can generate higher profits for the retailer and the supplier. Through comparative analysis, we show that the supplier’s initial capital and unit production cost affect participants’ preferences between options of insurance buyers. Specifically, the retailer prefers SI if the unit production cost is high and prefers FI otherwise, and the factor chooses SI if the unit production cost is relatively low and the capital constraint is relatively high and prefers FI otherwise. Furthermore, we find that the FI scheme can achieve Pareto improvement for all participants if the supplier’s capital constraint is at a medium level. These findings prove the rationality of factors acting as TCI buyers, which provide important implications for participants selecting appropriate insurance schemes for factoring finance