Financing the retailers with default probabilities: capital constrained supplier vs. bank

In this paper, we examine a supply chain consisting of a supplier with capital constraint and multiple retailers with no working capital. The retailers can get either trade credit from the supplier or loan from banks. All the retailers are differentiated by their credit scores, which measure the possibility that they default. We show that when the retailer's default probability is high compared with the marginal cost, the retailer cannot get financial support. If the retailers only get money from banks, the more reliable a retailer is, the higher the wholesale price the supplier may charge him. We also find out that the supplier has the motivation to provide trade credit even when the retailers can get money from banks. And no matter where the retailers get money from, when the initial capital is a little insufficient, the supplier will reduce the quantity of the products provided to all retailers. As the initial capital becomes less, the supplier will cut off all the supply to the lowest-score retailer first no matter whether the supplier undertakes the default risk or not. In other words, when the retailers are heterogeneous, for supplier, it is not always the more retailers, the better.