Retailer Initiated Inventory-Based Financing


In this paper we study an innovative financing scheme in which a large retailer provides inventory-based financing (IBF) to a small retailer selling through her own brick-and-mortar channel. In anticipation of a peak selling period, the small retailer could repeatedly pledge her on-hand inventory in exchange for a loan amount, which is in turn used to procure more inventory, i.e., stockpiling to fulfill a stochastic customer demand. Following sales proceeds, the small retailer buys back the pledged inventory to the extent possible, and defaults on any leftovers which will be liquidated by the big retailer via his own platform. We analyze the effectiveness of such financing scheme through a Stackelberg game, and explore its impact on operational decisions and contract design. In particular, we derive the optimal joint inventory ordering and pledging decisions for the small retailer during the stockpiling phase; we further characterize the optimal loan interest rate for the big retailer. Using datasets obtained from the financial technology arm of a major retailer, we provide empirical evidence that small retailers exhibit stock-piling behavior when using IBF. When further verify the predictions from the theoretical results through reduced-form analysis.

Working Paper. (Will be presented at MSOM 2022 SIG.)
Hongyu Chen 陈泓宇
Hongyu Chen 陈泓宇
PhD Student at IDSS