Who is the best insurance buyer? Financing the capital-constrained manufacturer with trade credit insurance

Reverse factoring is a widely used finance solution for capital-constrained upstream enterprises. To effectively avoid the risk of unpaid debt, the integration of trade credit insurance (TCI) into factoring finance, encompassing reverse factoring, has gained increasing popularity. Motivated by the practice that both manufacturers and factors can act as TCI buyers, this study examines the decision analysis in two TCI schemes, i.e. the manufacturer-insured TCI (<i>MI</i>) and the factor-insured TCI (<i>FI</i>), on optimal decisions and profits of supply chain participants through game analysis. We find that when the manufacturer is highly capital-constrained, compared with the benchmark scenario without insurance, both <i>MI</i> and <i>FI</i> can generate higher profits for the retailer and the manufacturer. Through comparative analysis, we show that the manufacturer’s initial capital and unit production cost affect participants’ preferences in insurance options. Specifically, the retailer prefers <i>MI</i> if the unit production cost is high and prefers <i>FI</i> otherwise, and the factor chooses <i>MI</i> if the unit production cost is relatively low and the capital constraint is relatively high and prefers <i>FI</i> otherwise. Furthermore, <i>FI</i> scheme can achieve Pareto improvement for all participants if the manufacturer’s capital constraint is at a medium level.