What is dynamic discounting?

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.

How does dynamic discounting work?

While different dynamic discounting solutions will have different processes, most will include the following steps:

1. Buyer purchases goods or services from supplier.
2. Supplier uploads invoice onto the dynamic discounting platform.
3. Buyer approves the invoice for payment.
4. Supplier views the discounts on offer for a range of payment dates.
5. Supplier accepts the preferred discount.
6. Supplier receives payment on the chosen date.

Benefits of dynamic discounting

Both buyers and suppliers can benefit from dynamic discounting in a number of different ways.

Benefits for buyers

• Attractive risk-free returns. By offering dynamic discounting, buyers are effectively investing their own cash in order to capture discounts – and these translate into risk-free returns which are greater than the returns offered by traditional investment.
• Achieve cost savings. By taking advantage of early payment discounts, buyers reduce the cost of the goods and services they purchase, which can support procurement KPIs.
• Strengthen supply chain health. Offering customers early payment increases the resilience of your supply chain and reduces the likelihood of any disruption.
• Improve supplier relationships. Supplier relationships can be strengthened when suppliers are offered early payment, as well as access to a user-friendly platform.

Benefits for suppliers

• Boost working capital position. By receiving early payment, suppliers can reduce their days sales outstanding (DSO) and thereby improve their cash conversion cycle.
• Access low-cost funding. With dynamic discounting, suppliers typically gain access to funding at a lower cost than other options available to them, enabling them to handle unexpected costs or invest in growth and innovation.
• Improve cash forecasting. Suppliers can decide when to get paid, making it easier to forecast future cash flows and plan ahead.
• Choose which invoices to finance. With a flexible dynamic discounting solution, suppliers can choose whether to finance a single invoice, several invoices, or all invoices.