Options of financing strategies: On the advantages of profit performance and signaling efficiency

Abstract

In supply chains where downstream retailers, often small and medium-sized enterprises (SMEs), face capital limitations and information asymmetry, core enterprises (CEs) often aim to enhance overall performance by implementing financing assistance and conveying demand information They can choose to offer trade credit finance (TCF) or provide partial credit guarantee (PCG) financing as signaling mechanisms, but the effectiveness and profitability of these strategies remains unclear. To address this gap, this paper establishes an analytical model to compare and examine the signaling role and profitability of these financing strategies. Our findings indicate that CEs can credibly signal the demand state through both financing contracts, with signal distortions reduced through TCF for the CE and PCG for the retailer. Both supply chain members achieve a Pareto improvement by adopting PCG when production costs or interest rates are low, as the residual default loss exceeds the interest revenue or financing costs decline. Similarly, a Pareto improvement can be achieved through TCF when either production costs or interest rates are high, reducing the likelihood of bankruptcy or raising financing costs. Notably, PCG under information asymmetry achieves a larger win-win area compared to information symmetry. In addition, if the supply chain characteristics are interchanged, only TCF can achieve a Pareto improvement at a low financing rate. These insights shed light on the advantages of PCG and TCF for financing SMEs, offering valuable guidance for managers when selecting suitable financing strategies. This study contributes to understanding the signaling role of different financing strategies, specifically TCF and PCG, in supply chain contexts.