Credit Benefit of Reverse Factoring in Iran: An Agent-Based Approach

We investigate the effects of the implementation of reverse factoring on the credit risk level of financially constrained suppliers within a supply chain. To simulate the desired supply chain finance environment, an agent-based framework is developed. Short-term bank financing and reverse factoring are available financial instruments for suppliers. The estimations regarding the default probability of agents are calculated using formulations of the KMV (Kealhofer Merton Vasicek) model. It incorporates market-based information and company-specific financial data to estimate the likelihood of default and potential losses based on the estimation of the market value and volatility of the firm’s asset and calculation of the distance to default. Results suggest that the adoption of reverse factoring significantly alleviates the credit risk levels of financially constrained members of a certain layer within a supply chain.