Innovations in digital supply chain finance: mitigating payment term and liquidity risks for SMEs

Abstract

This study develops a two‑stage, game‑theoretic model to analyse how payment term and liquidity risks affect small and medium‑sized enterprises (SMEs) in supply chain finance (SCF). The model simulates a purchase order financing (POF) setting in which suppliers face uncertain payment delays and liquidity constraints, which we model using exponential and Poisson distributions, respectively. Building on this foundation, we evaluate two emerging digital SCF solutions, factoring with smart contracts (FSC) and online invoice trading (OIT), and benchmark them against traditional order‑to‑factoring (OTF). Our model captures strategic interactions between suppliers and retailers under varying risk conditions. The results show that FSC effectively mitigates payment term risk and enables both suppliers and retailers to achieve higher profits than under POF. Moreover, FSC outperforms OTF when the liquidity risk discount exceeds the premium charged for factoring. OIT, which simultaneously addresses both payment term and liquidity risks, consistently delivers the highest value, especially in high liquidity risk environments. While liquidity risk reduces the relative benefit of FSC, it increases the value proposition of OIT. Furthermore, the benefit of mitigating payment term risk initially increases for both FSC and OIT, but this effect tapers off as risk intensity grows. These findings offer practical guidance for SMEs selecting financing strategies under uncertainty, for financial institutions designing responsive SCF products, and for policymakers seeking to narrow the SME credit gap through digital innovation.