Improving assessment capability for accounts receivable pool financiers. An empirical investigation

Date31 December 2019
Published date31 December 2019
DOIhttps://doi.org/10.1108/IMDS-04-2019-0239
Pages547-566
AuthorXiao Song,Hao Ying,Xiande Zhao,Lujie Chen
Subject MatterInformation & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems
Improving assessment
capability for accounts receivable
pool financiers
An empirical investigation
Xiao Song
School of Business Administration,
South China University of Technology, Guangzhou, China
Hao Ying
China Europe International Business School,
Shanghai Jiaotong University, Shanghai, China
Xiande Zhao
Shenzhen Representative Office, China Europe International Business School,
Shanghai, China, and
Lujie Chen
International Business School at Suzhou (IBSS),
Xi'an Jiaotong-Liverpool University, Suzhou, China
Abstract
Purpose The accounts receivable pool (ARP) is an e-invoice management system that provides suppliers
with easy access to financial service. The purpose of this paper is to focus on the strength and weakness of
ARP mechanism and suggest efficient methods to identify creditworthy borrowers.
Design/methodology/approach By decomposing the sales records of 348 ARP borrowers and predicting
the occurrence of overdue incidences, this study first portrays the creditworthy borrowers by sales features.
Then, content analysis was applied to measure the loadings of soft and hard information, and examined the
effectiveness of different information structures in creditworthiness assessment.
Findings For ARP borrowers, upward trend and low volatility reveal their creditworthiness. In order to
identify creditworthy borrowers beforehand, ARP financiers who have elaborated more soft information and
less hard information can perform better.
Originality/value This study first discussed ARP finance from a critical perspective and underlines
borrower assessment to eliminate the defect of loose recourse. The empirical evidence presents the sales
features of creditworthy borrowers. Moreover, the results suggest an efficient approach for ARP financiers to
conduct better assessment.
Keywords Information structure, Accounts receivable pool finance, Sales information
Paper type Research paper
1. Introduction
Electronic invoices are the product of modern information society. By the end of 2016, more
than 700m electronic VAT invoices had been released from 90,000 enterprises in China.
In the meantime, lacking credit rating, opaque information and deficient collateral
have made affordable bank credit unattainable to most small enterprises (Ma et al., 2019).
Industrial Management & Data
Systems
Vol. 120 No. 3, 2020
pp. 547-566
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-04-2019-0239
Received 13 May 2019
Revised 17 August 2019
31 October 2019
Accepted 3 December 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
This research is financial supported by a Major International (Regional) Joint Research Project
(71420107024) of the Natural Science Foundation of China (NSFC), Key Program Special Fund in
XJTLU (Nos KSF-A-13 and KSF-A-06). In addition, the authors thank the anonymous referees, Tianhe
Tian for valuable suggestions on an earlier version of this paper, and participants in the International
Conference on Operations and Supply Chain Management for helpful discussion.
547
Improving
assessment
capability for
ARP financiers
As an innovative mode to be expected, accounts receivable pool (ARP) finance is a financial
service derived from electronic invoicing system. ARP financiers, mostly banks, connect
their lending system with the borrowers invoicing system, and provide loans on the
receivables from manifold transactions.
The general procedures of ARP finance are shown in Figure 1. In the preparatory period,
the bank evaluates an industry and creates a core buyer directory. Then, when suppliers
release invoices but the core firms delay the payment, the lending system will examine the
invoices and manage them in the invoice pool. With the pooled invoices, the suppliers can
select and pledge some invoices to obtain bank credit in a discount volume. The credit
outstanding will be settled when the core buyers remit to specific transaction account or the
suppliers repay by themselves. The rest invoices, which have not been pledged, will flow out
from the pool after a limitation period (three months according to the banks policy).
Comparing to traditional accounts receivable (AR) finance which follows single
transaction, the pooling mechanism of ARP can manage various transactions and thus
increase credit scale and flexibility of borrowing. Moreover, with real-time data from
electronic invoices, borrower assessment should be timelier and more efficient. The
weakness of ARP finance is also obvious. ARP financiers commonly cannot monitor all
payment behaviors in transaction. The potential risks of loose recourse claim more efforts to
identify creditworthy borrowers before loan (Hofmann and Zumsteg, 2015).
Regarding the above particularities, it is surprising that available knowledge about the
underlying mechanism of ARP is scarce. With regard to invoices, one must keep in mind
that they are not only accounting vouchers, but also the mirror of a companys operations
and business development (Alwert et al., 2009; Peruta et al., 2014; Schanz, 2009). This study
bases investigation on longitudinal invoicing data, and aims to explore knowledge
underlying the ARP assessments. The main research questions to answer are:
RQ1. What borrowers are creditworthy according to the features of sales?
RQ2. How to identify the creditworthy borrowers early in assessment phase?
To answer these questions, we first predicted cash insolvency by the long-term trends and
short-term volatility of sales. The results portray creditworthy firms and imply the
importance of identifying stable borrowers. Next, we investigated the archived reports from
borrower evaluation and approval (E&A), and distinguished the effectiveness of their
loaded information with the borrowersex-post sales features.
In its contribution, this study first elaborates the short slab of ARP finance regarding
risk management. The main concern of the financiers is how to make better use of pooled
invoices and identify creditworthy borrowers beforehand. However, the extant literature did
Core firm 1 Core firm 2 Core firm 3
Account receivable (invoice) pool
Real - time credit exposure
Loan 1
+++
...... Loan nRepay-
ment 1
Repay-
ment m
Core firm N-1 Core firm N
Figure 1.
The service model of
ARP finance
548
IMDS
120,3

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