Supply chain finance (or reverse factoring) and dynamic discounting are two different ways to offer early payments to your suppliers – but which funding model do you choose to achieve your goals? The answer: both.
So, you’ve decided to support your suppliers using an early payment solution. The benefits are clear: by enabling suppliers to receive payment sooner, you can bolster the health of your supply chain, strengthen supplier relationships and reduce the likelihood of disruption to your own business.
So far, so good — but deciding to adopt a solution is only the first step. There are other choices to make along the way, not least of which is what type of funding model you want to use.
For example, you could opt for a traditional bank funded solution typically targeted at your top 50-100 suppliers. Or if you have excess cash available, you could put that cash to work by taking advantage of early payment discounts. But what if you want the flexibility to switch between the two funding models, or use both models simultaneously?
Supply chain finance vs dynamic discounting
There’s more than one way to offer early payments to your suppliers. Most vendors in this space offer a solution based on one of two different models:
What is supply chain finance (also known as reverse factoring)?
Supply chain finance models usually take the form of bank funded solutions which offer to pay suppliers early. You simply pay the invoice at maturity into the bank’s remit-to account.
Companies may use this approach in conjunction with a terms extension program — so you can improve your own working capital position through improving your Days Payable Outstanding, whilst allowing suppliers to accelerate their receivables at a cost of capital generally much lower than they currently fund their business at.
What is dynamic discounting?
Dynamic discounting is a solution that gives suppliers flexibility in taking payments earlier than the due/payment date, in exchange for a small discount. It’s dynamic because it can allow suppliers to strike the right balance between cost and payment date. Generally, the earlier the payment is made, the greater the discount will be.
Using dynamic discounting, your suppliers can also have their invoices paid early — but this time, you’re the one funding them. Enabling you to take advantage of automated early payment discounts, dynamic discounting gives suppliers the choice of which invoices they choose to accelerate, and how early they wish to be paid.
If you have plenty of unutilised cash that isn’t generating great returns, deploying that cash to suppliers and thereby improving your gross margin can be an attractive option.
Which one to choose?
It’s easy to assume you’ll have to choose between supply chain finance and dynamic discounting models when adopting an early payment solution — as this is how it has been in the market for a long time. But having to settle on a single funding route is not always ideal.
In today’s fast paced world, your business needs and the external economic climate can change rapidly, so the model that works for you today may not be such a good fit in two years’ time. Likewise, if your business model includes seasonal variations, you might need both models at different times of the year.
Consequently, if you opt for one funding model over another, you may find you are boxed into a solution that only covers part of your needs, or that won’t evolve with your business over time. One option is to work with two different providers to adopt both models but this is usually an inefficient set-up.
It will generally require separate cumbersome provider agreements, presents disjointed supplier user experiences, and moving suppliers from one solution to the other can be impractical, meaning a poor overall experience for the suppliers.
Luckily, there is another option. Not choosing between supply chain finance and dynamic discounting and instead using both.
Unlike other providers, Taulia offers a flexible funding solution that includes both third party-funded and self-funded early payment models within a single “supplier friendly” user experience — meaning you and your suppliers don’t have to choose between the two approaches.
Using a flexible funding model, companies can use a single early payment platform to access both types of finance. Taulia’s integrated approach makes it easy to move from one funding mechanism to another, without any need for suppliers to re-enroll or carry/remember multiple tokens/passwords.
So, rather than being pigeonholed into a single model, you can switch between different funding sources when it suits your business cycle or as your needs evolve – without impacting your suppliers and your own internal processes.
If you’re a retailer, for example, your business cycle will have peaks and troughs throughout the year. During holiday season you might have plenty of cash and be looking to deploy it effectively by paying suppliers early and improving your gross profit margin while, at other times of the year, you might want to deploy cash elsewhere, for example in order to ramp up stock purchasing, accordingly you may prefer to switch to third party funding during these periods – all without impacting your suppliers’ early payment needs.
Flexibility for suppliers of all sizes
Another benefit of the flexible finance approach is there’s no need to distinguish between large and small suppliers. Early payment solutions often use complicated methods for onboarding suppliers that can deter SME suppliers from signing up – restricting the deployment of the solution down the entire supply chain. But SMEs face particular challenges when it comes to accessing funding from financial institutions and may benefit the most from this type of program.
In contrast, a flexible funding program with a streamlined onboarding process can bring the benefits to all your suppliers, no matter how large or small. Above all, suppliers want a simple cash-collection experience that ensures predictable uninterrupted cash receipts with attractive early payment offers (better than any other alternate source of financing).
In today’s fast-paced world it’s not enough to have a solution that is a good fit right now if it doesn’t have the flexibility needed to support your business in the future. If you want to ensure your supply chain’s health, you need a solution that can grow with you across different economic cycles and working capital cycles. With a flexible early payment platform that includes 3rd party funding or self-funding, there’s no need to select one funding model over another – so why choose?
Don’t compare supply chain finance and dynamic discounting – make use of both.