Abstract: For capital-constrained retailers, bank financing and supplier financing are two important sources of funding. In this paper, we compare the two financing methods when the retailer has the risk of bankruptcy. Our analyses show that because of higher profit, the supplier with sufficient capital is more inclined to finance the retailer. For suppliers lacking capital, they are willing to finance the retailer even if they must borrow from outside using financing methods such as mortgage. However, when the retailer has the bargaining power, these results may not hold any more. In fact, the supplier who provides financing may get a lower profit. The analyses show that with supplier financing, the supplier’s profit increases with the retailer’s risk of bankruptcy.

Key words: bank financing, supplier financing, bankruptcy risk, mortgage loan, bargaining power