Financing And Operation Decisions Of Small And Medium Enterprises With Merchant Cash Advances

In2007, the global financial tsunami has severely affected the economy worldwide. In both manufacturing and service sectors, companies have encountered various difficulties such as reduced demands and financing problems. The obstacle of accessing credit is especially worse for small and medium enterprises (SMEs) which usually with limited self capital, heavily rely on bank loans for their operations. There has been lots of evidence showing that banks have tightened credit standards to SMEs since the onset of the financial turmoil. Various efforts have been made to help SMEs access more credits, but it cannot completely solve the SME financing problems. Consequently, many SMEs have to seek some alternative nontraditional financing tools. Meanwhile, in recent years, people have realized that it is necessary to integrate the operation management (OM) and financial decisions when market imperfection exists, for example, the problems of integrating inventory control with cash flows planning under different financing terms.As a new way of financing, Merchant Cash Advances (MCA), is especially suitable for the underfunded, small and medium-sized manufactures (retailers). This paper is the first attempt to incorporate Merchant Cash Advances financing decision into production decisions, expecting to contribute some theoretical studies on financial management and OM for SMEs, and to theoretically support the product innovation for financial institutions.This dissertation proceeds from the financing problem of SMEs, analyses the advantages and disadvantages of the existing financing tools on availability and application for SMEs, summaries and qualitative analyses several new financial tools suitable for SMEs, and one of which named MCA has been quantitative studied in detail. More specifically, the studies in this dissertation can be summarized as follows:First, based on enterprise resource theory, we illuminate that capital, the basic of financial resource, playing an important role in the survival and development of enterprises; and then discuss some new financial tools which are suitable and available for SMEs, including Factoring, Asset-based Financing, Customer Financing and MCA. MCA is the focus of this study, which is divided into the basic MCA and MCA with minimum sales restrictions, according to risk preference of the finance companie and the trade mode actual used.Second, under the deterministic demand assumption, the financing decision and pricing decision are integrated into SME’s optimization model based on the two MCA modes respectively, and the optimization model of financial institute is also formulated to determine the optimal allocation rate, and Stackelberg equilibrium is obtained. The relationship between the optimal decisions of both sides is revealed and the optimal solutions of both MCA modes are compared. The result demonstrates that by restricting the minimum sales, financial institution can not only get the expected rate of return, but also can improve the total profit of the system.Third, under uncertain demand, we first get the Stackelberg equilibrium of SME and the finance company under basic MCA mode, and compare it with the Stackelberg equilibrium obtained under loan mode with the same condition. And then, we study the problem of coordinating financing decision and production decision for SME with minimum sales restriction. Different from the financing newsboy model under loan, the objective function of the proposed model cannot be rewriten into one with single decision variable. To find the optimal solution of this problem, we analyze the feasible regions under different parameter situations; get the optimal solution for each situation. In the matter of fact, the optimal decision has only four possible expressions. Correspondingly, the SME has four policies at most, and how many policies SME has depends on its parameters. Experimental results demonstrate that both the increase of the ratio of price and unit cost and the allocation rate given by the finance company will make the SME experience four situations in proper order. Furthermore, the relationship between the optimal decisions of the enterprise and the allocation rate has been discussed, which lead us finding out the specific allocation rate that makes enterprise produce most. This rate can also lead both the finance company’s profit margin and system profit to maximal value.Last, the legal issues involved in the actual application of MCA are studied. During the research, we note that usury laws may have an important impact on the profits of both parties. Therefore, in order to solve the optimization problem of coordinating financing, pricing and production decisions under the constraint of usury laws, a model with uncertain demand is formulated. There are three decision variables in this model, which can be simplified into two sub-problems with two decision variables. The specific method to solve the sub-problems is given. Numerical experiments are conducted to evaluate the influence of the amount of enterprise funds on their decisions.