Buyer finance has been practiced by manufacturers/assemblers for years; however, few papers have investigated the efficacy of buyer finance in an assembly system with multiple suppliers. This paper fills the literature gap by comparing buyer finance with bank finance in a supply chain with one assembler and multiple heterogeneous capital-constrained component suppliers. We characterize the equilibrium solutions for different financing schemes (i.e., buyer finance, bank finance, and no finance). We show that in buyer finance the assembler should charge the suppliers the lowest possible interest rate, which may be even below its own unit capital opportunity cost, leading to interest losses in financing suppliers. However, the assembler can benefit more from enhanced inventory backup and lower component purchasing prices resulting from the low buyer-finance interest rate. We further compare the two financing schemes from the perspectives of the assembler, the borrowing and nonborrowing suppliers, and the whole supply chain. Our analysis reveals that the assembler may offer buyer finance even if its own unit capital opportunity cost is higher than the bank risk-free interest rate. We also demonstrate how the suppliers’ initial capitals, production costs, and their heterogeneities affect the assembler’s selection of the optimal financing scheme and identify the conditions under which buyer finance is better than bank finance for different parties in this assembly supply chain. The online appendix is available at https://doi.org/10.1287/msom.2017.0677 .

The convention of selling on credit (to customers) results in mass accumulation of accounts receivable (AR) on the balance sheet of firms. However, capital‐constrained firms do not have enough capital to invest in AR and cover the production cost incurred during the credit period. To finance future business, a capital‐constrained firm can employ factoring—a financing scheme wherein firms sell AR to a financial institution (called a factor) at a discount—to advance cash from AR. By formulating a time‐continuous model with constant demand over an infinite horizon, we study the factoring policy of firms in two practice‐based discounting schemes: automatic discounting and manual discounting. In the automatic discounting scheme, AR should be discounted at the same age, whereas this requirement is relaxed in the manual discounting scheme and how long in advance to discount the AR is contingent over time. In both discounting schemes, the firm needs to choose the timing of discounting in order to reach a capital‐unconstrained state as soon as possible. In the automatic discounting scheme, we approximate the firm's objective function with a quasi‐convex function whose error is demonstrated to be small. Based on this approximation, the firm's optimal decision and the factor's profit can be calculated more easily. When manual discounting is adopted, the firm should meet all the demand by exploiting factoring if the profit margin under immediate discounting is nonnegative. Given the same factoring discount rate, manual discounting is always more attractive to the firm than automatic discounting. However, the preference of the factor over the two discounting schemes depends on the factoring discount rate.

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