Dynamic discounting is a financing technique that allows companies to receive early payment on their invoices in exchange for a discount. In a dynamic discounting arrangement, a company can offer its invoices to a financing provider at a discounted rate, and the provider will pay the company the discounted amount upfront.
The company then receives the full amount of the invoice from the customer at a later date. This allows the company to receive early payment on its invoices, improving its cash flow, while the financing provider earns a return on the difference between the discounted amount and the full invoice amount.
As a result, suppliers can typically access lower cost funding than they might otherwise receive, while harnessing working capital in order to invest in growth and innovation.
Buyers, meanwhile, can gain an attractive risk-free return on their excess cash. Dynamic discounting has some features in common with supply chain finance. Unlike supply chain finance, however, dynamic discounting is financed by the buyer rather than by a third-party finance provider.
The idea of early payment discounts is nothing new. But in the past, this tended to mean sticking to fairly rigid terms.
A common example is 2/10 net 30, whereby the supplier offers the buyer a 2% discount if an invoice is paid within ten days.
Otherwise, the buyer can pay in full at 30 days. Under this model, there is no discount available if the buyer pays after 12 or 15 days.
Today, dynamic discounting offers a far more flexible arrangement, allowing suppliers to get paid at any time between the invoice being approved, and the agreed payment term. The earlier the invoice is paid, the greater the discount the buyer receives.
The supplier creates an online portal where the buyer can log on to approve and pay their invoice. With the click of a button, they can choose to pay the invoice whichever way they like, and the supplier can then access their funds as soon as the buyer’s payment is received.
The supplier’s portal offers the buyer three payment options:
Improved cash flow - The main benefit of dynamic discounting for buyers is access to lower-cost funding, freeing up cash that could otherwise be tied up in slow-moving invoices. In doing so, they also improve their cash flow, reducing the risk of late payment penalties and improving their relationship with suppliers.
Improved supplier relations - If a buyer’s cash flow is healthy, they are less likely to become impatient with their suppliers and more likely to remain a reliable customer. This ensures a strong relationship of mutual benefit, helping both parties to grow.
Improved supplier performance - If a buyer’s cash flow is healthy, they are less likely to become impatient with their suppliers and more likely to remain a reliable customer. This ensures a strong relationship of mutual benefit, helping both parties to grow.
Improved cash flow - The main benefit of dynamic discounting for suppliers is access to lower-cost funding, freeing up cash that could otherwise be tied up in slow-moving invoices. In doing so, they also improve their cash flow, reducing the risk of late payment penalties.
Improved buyer relations - If a supplier’s cash flow is healthy, they are less likely to become impatient with their buyers and more likely to remain a reliable supplier. This ensures a strong relationship of mutual benefit, helping both parties to grow.
Improved buyer performance - If a supplier’s cash flow is healthy, they are less likely to become impatient with their buyers and more likely to remain a reliable supplier. This ensures a strong relationship of mutual benefit, helping both parties to grow.
There are some similarities between dynamic discounting and supply chain finance. Both solutions offer suppliers the option of early payment, and both make use of a third-party risk assessment.
However, there are also some notable differences between the two. With dynamic discounting, the amount supplied is based on the amount of the buyer’s approved invoice, while with supply chain finance, the amount is calculated using the supplier’s forecasted sales.
With dynamic discounting, the buyer pays the amount into the supplier’s bank account, while with supply chain finance, the supplier holds the funds as an asset against which they can borrow.
Dynamic discounting is a solution that provides suppliers with the option of receiving early payment in exchange for a discount on their invoice. As a result, suppliers can typically access lower cost funding than they might otherwise receive, while harnessing working capital in order to invest in growth and innovation.
Buyers, meanwhile, can gain an attractive risk-free return on their excess cash. Dynamic discounting has some features in common with supply chain finance.
Unlike supply chain finance, however, dynamic discounting is financed by the buyer rather than by a third-party finance provider.
The idea of early payment discounts is nothing new. But in the past, this tended to mean sticking to fairly rigid terms. A common example is 2/10 net 30, whereby the supplier offers the buyer a 2% discount if an invoice is paid within ten days.
Otherwise, the buyer can pay in full at 30 days. Under this model, there is no discount available if the buyer pays after 12 or 15 days.
Today, dynamic discounting offers a far more flexible arrangement, allowing suppliers to get paid at any time between the invoice being approved, and the agreed payment term. The earlier the invoice is paid, the greater the discount the buyer receives.
