Support a financially constrained supplier with order financing and refundable non-refundable advances

This study considers a supply chain in which a credit-worthy buyer purchases goods from a capital-constrained supplier to satisfy her deterministic demand. The buyer simultaneously implements both cash in advance (CIA) and purchase order financing (POF) as part of their pre-shipment financing (PSF) schemes to fund the supplier's operation. This research classifies CIA based on refundability, considering the increasing use of mitigating services or platforms associated with these PSF schemes. The study provides guidelines for aligning these primary PSF schemes with purchasing decisions, strengthening the buyer's ability to develop suppliers in sectors with small vendors, such as agriculture and dairy farming. We reveal that whether or not a CIA agreement includes so-called refundability strongly affects buyer preferences for CIA and POF. Specifically, we summarize our findings as follows: (1) Pure CIA financing strategy is optimal when CIA is refundable, which implies refundable CIA dominates POF. (2) When CIA is non-refundable, POF is preferred over CIA because POF allows a buyer to share the financing risk with a bank, whereas non-refundable CIA involves high risk. (3) When CIA is non-refundable, we recommend the buyer implement a mixed financing strategy, with POF and CIA as primary and backup financing options, respectively.