Reverse Factoring: A Theory on the Value of Payment Terms Extension

Reverse factoring is a financial instrument that large creditworthy firms use to facilitate low cost financing to their suppliers by confirming future payment obligations to financial intermediaries. This paper studies the implications of reverse factoring on the buying firm’s capital investment decision in the face of deadweight costs for external financing. Our results show that the implementation of reverse factoring with payment terms extension can facilitate higher investment to the benefit of the integrated supply chain.