Buyer-Initiated Direct Financing and Dividend-for-Guarantee Swap Financing: Mitigating Financial Constraints in Supply Chains

This study investigates the comparative effectiveness of two buyer-initiated financing schemes, namely direct financing (DF) and dividend-for-guarantee swap financing (DGF), within a supply chain comprising a financially constrained supplier and a large retailer. DGF is an innovative guarantee financing program that contributes to mitigating the risk-return imbalance for guarantors. We develop Stackelberg game models and derive equilibrium decisions for each financing scheme separately under the two wholesale pricing scenarios: exogenous and endogenous. Our research indicates when the wholesale price is predetermined exogenously, either of the two financing schemes can be preferred by all supply chain parties, depending on the wholesale price, the production cost, and the profit dividend ratio. However, under the endogenous wholesale pricing scenario, both the retailer and the entire supply chain consistently prefer DGF over DF, whereas the supplier only benefits from DGF when the production cost is comparatively high. We further identify conditions under which both the supplier and the retailer exhibit alignment in their preferences, finding that both DF and DGF can create a win-win situation (i.e., preference alignment) for both parties under an exogenous wholesale pricing scenario. Nevertheless, only DGF can ensure a mutually beneficial outcome under an endogenous wholesale pricing scenario. Interestingly, we demonstrate that DGF retains a beneficial tolerance effect towards high production costs and high wholesale prices. Such a distinctive financing advantage of DGF can foster a triple-win situation for the retailer, supplier, and the entire supply chain.