Abstract: As the changing from seller's market to buyer's market, small and medium sized suppliers are facing more challenges than ever before. To acquire the market share, they should rely on sell on credit, rather than the traditional letter of credit. Abundant working capital has been occupied with accounts receivable bid on foreign currency. These small suppliers face not only such liquidity problems, but also deprecation of accounts receivable due to foreign exchange fluctuations, which become more volatile afterthe breakdown of Bretton Woods System. To help these suppliers to grow, some financial institutions step up to offer financial scheme such as factor financing. A theoretical model with a budget-constraint supplier, who makes integrated production and financial decisions when faced with both demand risks and foreign exchange risks,is built up. The supplier is a risk averse agent with mean-variance considerations. Firstly, the supplier's optimal integrated decisions are shown. When the variance constraint is active, the optimal factor financing ratio is increasing with the value of the account receivable. Other parameters have negative impact on the production decision and factor ratio decision. It is found that factor financing indeed mitigates the liquidity problem of the supplier by expanding the feasible region for production decision. While this financing scheme may have double effects on the supplier's risk exposures, on one side it will eliminate the foreign exchange risks, on the other side it will indeed increase the demand risk. Factor financing may not always add value to the supplier all the time. The SME managershould balance these two effects depending on thereal situation.

Key words: factoring financing, foreign exchange risk management, SME financing, OM&, finance interface