Trade Finance Contracts for Small-Business Suppliers

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Web platforms are transforming the way small businesses (suppliers) sell their products and obtain trade finance. Specifically, small businesses, the engines of job creation in the U.S., often sell their products on web platforms (retailers) such as Amazon, E-bay, and Spun and may obtain financing either directly from the retailer (via either a loan or a purchase commitment) or crowd-funding options such as KickStarter, IndeGoGo, and Crowdfunder. This research will develop new mathematical models to evaluate emerging trade-finance options including (1) direct financing, (2) purchase commitment, and (3) crowd-funding, from the viewpoint of small businesses, retailers, and supply chains. Specifically, this research project seeks to answer the following questions: 1. What are the optimal operational and financial decisions for suppliers and retailers under each finance option? 2. Which option is superior for small-business suppliers? 3. Which option has the potential to achieve maximum supply chain efficiency? 4. Does the availability of third-party credit improve supply chain's efficiency? (This is motivated by the fact that third-party lenders (e.g., banks) are often more willing to offer loans if suppliers receive some financing from either retailers or crowd sources.) Trade finance is important because small businesses often find it difficult to obtain commercial loans to support their operations; small businesses account for 60 to 80 percent of all US jobs; U.S. Census Bureau reports that e-commerce has steadily gained momentum, increasing from about 0.8 percent of total retail sales in the first quarter of 2000 [approximately $5.8 billion of $740 billion] to 5.9 percent in the third quarter of 2013 [approximately $67 billion of $1.14 trillion]; crowd-funding platforms raised $2.7 billion in 2012 across more than 1 million individual campaigns globally; and the JOBS Act is expected to accelerate the pace of crowd-funding by permitting companies to participate in equity-based, online crowd-funding. The results of this research will inform suppliers and retailers which financing options are best for them and for the supply chain as a whole. The research will help train highly qualified personnel by offering research opportunities for doctoral and undergraduate students in engineering. This research project will lead to (1) new models for establishing optimal trade-finance and operations' strategies for economically significant small-business suppliers, (2) new insights about the optimal production-policy structure under different finance options, and (3) economic models for the crowd-funding paradigm. These methods will comprise stochastic comparisons, dynamic programs, equilibrium analysis of single and multi-period games, and statistical analysis of crowd-funding data (e.g., mixed-effects models). The underlying multi-period stochastic optimization problems are challenging because the structure of an optimal production-policy is not known. Moreover, no previous work has investigated the retailer's problem of choosing either the interest rate or the commitment rate in a multi-period setting. Similarly, there is limited research on modeling the decision problems faced by suppliers who attempt to raise capital via crowd-funding - e.g., how much price discount to offer to contributors. By modeling emerging trade-finance paradigms, this research will open new areas of inquiry for other researchers. The principal investigator's efforts will also help small-business suppliers make better trade-finance and operational decisions.