Financing Cooperative Supply Chain Members — The Bank’s Perspective

Abstract

This paper contributes to the supply chain finance literature with an agent-based Monte Carlo simulation model focusing on the bank’s point of view. Our theoretical model assesses how a bank should screen a supply chain (SC) member and whether that requires different considerations and monitoring systems compared with traditional corporate loans. In the model, the SC members may cooperate, reducing their bankruptcy risk considerably; thus, the chance for and extent of inter-entity financial aid are critical to consider when assessing bankruptcy risk. A cooperative SC member cannot just be financed from debt taken by other members, but it may also offer protection to other SC members using its operating cash flow. Thus, based on our results, bankruptcy risk is SC-specific, rather than a characteristic of an individual firm. Therefore, to finance an SC member is a quasi-joint decision of its peers, so particular care should be paid to estimating and monitoring the correlations between the operational cash flows of cooperative SC members. One of the key results is that of edge default exposure of the bank; it might be optimal to limit the amount of the loan made available to a given collaborative SC member instead of charging higher rates or financing the most attractive SC member only. Another SC member offering an additional guarantee with its assets will provide the remaining need for financing. As this solution also reduces the total bankruptcy risk of the SC, the SC itself should prefer this financing structure.