# Debt vs. revenue share financing: A theoretical study on revenue share finance in a capital-constrained newsvendor

## TL;DR

This paper compares debt and revenue share financing for capital-constrained businesses, showing how key factors affect decision-making and profitability.

## Contribution

The study introduces a theoretical framework for analyzing revenue share financing in newsvendor models.

## Key findings

- Revenue share ratio, cost share ratio, and debt interest rate are critical in financing decisions.
- Both financing methods can yield competitive profits and order quantities under certain conditions.
- A bargaining interval exists between minimum and maximum revenue share ratios for optimal outcomes.

## Abstract

In the capital-constrained newsvendor paradigm, revenue share financing (RSF) presents a novel yet underexplored financing approach. This theoretical study conducts a comparative analysis of two financing methods: traditional debt financing and revenue share financing. Our research findings indicate that the revenue share ratio, cost share ratio, and debt interest rate are the most critical factors influencing retailers’ decisions. This study further demonstrates that, under certain conditions, both financing strategies can yield competitive profit margins and order quantity. Additionally, we discovered that fund providers have a minimum revenue share ratio, whereas for retailers, there is a maximum revenue share ratio. These two ratios establish a bargaining interval within which an optimal revenue share ratio can be achieved if it falls within this range. Outside this range, RSF is either unattainable or impractical.