If you have surplus cash available, dynamic discounting offers a way of earning attractive returns while paying suppliers early and bolstering your supply chain. But what is dynamic discounting, how does it work, and what are the advantages of Taulia’s AI-powered solution?

May 11, 2020
By Taulia
By Taulia

What is dynamic discounting?

Simply put, dynamic discounting is a solution that empowers suppliers to choose when they get paid. It allows suppliers the flexibility to choose when they are paid for goods or services, with a lower price (or discount) given to the buyer for early payments.

The idea of early payment discounts is nothing new. But in the past, this tended to mean sticking to fairly rigid, pre-negotiated 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.

Dynamic discounting is far more flexible as it allows suppliers to get paid early at any time between the invoice being approved, and the agreed payment term. The discount on offer will vary depending on the payment window – so the earlier the invoice is paid, the greater the discount.

Benefits of dynamic discounting

For buyers

Unlike supply chain finance, dynamic discounting is financed by the buyer. By offering discounts to suppliers, you’re effectively deploying your own cash to achieve attractive returns – an appealing prospect given that interest rates continue to be low.

Buyer can benefit from dynamic discounting by:

  • Achieving low-risk returns. The return you receive comes without incurring any further risk, because discounts are issued based on invoices you’ve already approved.
  • Supporting procurement KPIs. By reducing your cost of goods purchased, dynamic discounting can help you achieve key procurement goals.
  • Strengthening supplier relationships. You can improve your supplier relationships by offering early payment via an attractive and easy-to-use solution.
  • Reducing supply chain risk. By supporting suppliers’ working capital, you can also reduce the risk of disruption within your supply chain.
  • Supporting strategic initiatives. Some companies use dynamic discounting to reward key suppliers with favorable funding rates.

For suppliers

The benefits for suppliers are clear: by taking advantage of early payment discounts, they can get paid much earlier than they otherwise would – thereby reducing their days sales outstanding (DSO).

This can be a major advantage for cash-poor suppliers, who may struggle to pay for the raw materials needed to complete your order weeks or months before they receive payment. Dynamic discounting can help to overcome that shortfall. Other benefits include:

  • Low cost of funding. Suppliers’ cost of funding via dynamic discounting is typically much lower than other financing options available, such as factoring.
  • Better cash forecasting. With dynamic discounting, suppliers can choose exactly when they want to get paid, allowing them to forecast cash more effectively and align inbound cash flows with upcoming obligations.
  • Choose which invoices to finance. Some solutions offer a high degree of flexibility. With Taulia’s dynamic discounting solution, for example, suppliers can choose whether they want to finance one or several invoices to meet one-off needs – or they can opt to have all invoices financed as soon as they are approved.
  • No obligation to take a discount. Of course, suppliers don’t have to accept the discounts on offer and can choose to receive payment in full on the invoice due date if they prefer.

How does dynamic discounting work?

While not all dynamic discounting programs are the same, they typically include the following steps:

  • Supplier uploads an invoice onto the dynamic discounting platform.
  • Buyer approves the invoice.
  • Supplier views the discount for offer on a specific payment date.
  • Supplier accepts the discount and receives payment on the chosen date – or alternatively, decides to wait until the invoice is due.

Some dynamic discounting platforms operate using an auction model, with suppliers ‘bidding’ by indicating what discount they will offer in exchange for early payment. The buyer can then choose to accept or reject any offered discounts. However, suppliers prefer the certainty and predictability associated with a non-auction program.

Taulia’s approach: dynamic discounting and technology

At Taulia, we are focused on harnessing the opportunities brought about by technology. For one thing, our platform – which is used by over 2 million suppliers – is compatible with all major ERP systems. Our SAP add-on also means you can achieve deep integration with SAP, meaning there’s no need for you to take any additional steps to process payments when using dynamic discounting.

Switching between dynamic discounting and supply chain finance

Instead of treating dynamic discounting and supply chain finance as separate solutions, Taulia offers both solutions via a single, easy-to-use platform. What’s more, our flexible funding model means that you don’t have to choose between the two early payment options. Instead, you can switch seamlessly between self-funded dynamic discounting and third-party funded supply chain finance as your needs evolve.

This may be valuable if your funding requirements change, or if your business cycle means you have surplus cash available only at certain times of the year.

To learn more about how dynamic discounting can help your business, get in touch with us here.