The Importance of Operations in B2B Financing

Mismatches can lead to lost profits and inefficiencies

Operations are the value-creation engine of an enterprise; working capital is the engine oil. Just as oil must be carefully formulated to meet an engine’s performance requirements, financial terms must be tailored to operational goals. A big idea in one tranche of my research is that mismatches between those two produce suboptimal outcomes. My colleagues and I have investigated this (mis)match across several B2B settings involving buyers (retailers) and sellers (suppliers).

Supplier financing — known as trade credit — shifts some demand risk from retailers to suppliers and influences retailers’ inventory purchase policies. A common trade credit imposes higher finance charges the longer a retailer takes to repay. For example, the first 30 days may be interest-free, followed by a 5% annualized rate up to 90 days, and then a higher rate plus penalties. In one area of my research, I show that the optimal structure of retailers’ purchase policies is unaffected by credit terms. Rather, suppliers’ profits — net of loan-default costs — are shaped by retailers’ operational decisions (i.e., how much they purchase). Suppliers who fail to calibrate inventory-age-dependent finance charges leave money on the table.

In a related setting, suppliers often cannot observe retailers’ sales revenue. Verification is costly, leading to loan write-offs when retailers claim inability to repay. Suppliers choose credit terms and a verification strategy; retailers choose purchase quantity and a reporting strategy. Conventional wisdom holds that suppliers should worry about losses. Countering this, I show that suppliers can earn higher profits because retailers may purchase more in anticipation of partial loan write-offs. Somewhat surprisingly, optimal outcomes arise when retailers hold a balanced asset position — neither too poor (low collateral) nor too rich (high collateral). As elsewhere, the best financing decision hinges on its alignment with the buyer’s operational strategy.

A third setting involves retail platforms such as Amazon that provide business loans to small suppliers, who may also borrow from institutional lenders such as banks. Platforms often impose debt seniority covenants that govern repayment priority; seniority is valuable because senior lenders are paid first in the event of default. Defying conventional wisdom, I show that platforms should not always require debt seniority. When they do, suppliers can overproduce — boosting their own profit while reducing total supply chain returns. Both parties could achieve higher returns by jointly selecting the optimal production quantity and splitting the gains.

Once again, operational decisions must align with financing structure in a specific way.

Martin, P. and Gupta, D. 2026. “Trade Credit With Costly Sales Revenue Verification.” Manufacturing & Service Operations Management. https://doi.org/10.1287/msom.2023.0443

Gupta, D. and Chen, Y. 2020. “Retailer-Direct Financing Contracts Under Consignment.” Manufacturing & Service Operations Management, 22:3, 429-643. https://doi.org/10.1287/msom.2018.0754

Gupta, D. and Wang, L. 2009. “A Stochastic Inventory Model With Trade Credit.” Manufacturing & Service Operations Management, 11:1, 4-18. https://doi.org/10.1287/msom.1070.0191