Imagine that your company is generating higher yields, improving liquidity and strengthening the relationship with your suppliers. Sounds good, doesn’t it? Dynamic Discounting offers many benefits for companies who are ‘cash rich’ and want to utilize this advantage in their favor. In this post you will find out what Dynamic Discounting, what types there are and the benefits it brings to the table for buyers and suppliers.
Dynamic Discounting is a solution that allows you to use your excess cash more efficiently while giving you the flexibility to decide when and how to pay your suppliers. The dynamic aspect refers to the possibility of receiving discounts from suppliers based on the number of days remaining until the initial payment term. The sooner the payment is made, the bigger the discount applied.
Many suppliers face cash flow challenges and find it hard to attract cheap working capital. Therefore, early payments can help them optimize their working capital needs to be able to purchase inventory, bridge payment delays, or invest in their business. The main benefit of Dynamic Discounting is that you get a better return on your cash than what banks are currently offering with a negative interest rate landscape.
In short, Dynamic Discounting offers an automatic system for managing payments to your suppliers to generate discounts without the need to negotiate with them individually.
The linear scale is when the buyer determines the rate at which he will offer the early payment to the supplier. The supplier decides whether to accept the buyer’s terms or not. Here the cost-saving is generated by a fixed discount rate times the number of days paid early.
The advantage of this method is that the buyer decides the discount applied. However, the potential of cost-saving is determined by the supplier, since he has the power to reject the early payment and get paid in the initial payment term.
The marketplace model is a newer approach to Dynamic Discounting. With a market that is always running, both price and time are totally dynamic. However, the suppliers initiate the offers and regulate the discount rate.
The suppliers choose which invoices they want to be paid early and when to participate in the program. When suppliers regulate the control on the discounts, it becomes a more affordable and flexible cash flow option for the supplier.
In recent articles, we talked about Supply Chain Finance. In some cases, Dynamic Discounting can be confused with Supply Chain Finance, however, these two are different in certain ways.
Supply Chain Finance (SCF, also known as Reverse Factoring), is a supplier payment management system in which suppliers are allowed to request early payments of their invoices instead of waiting for the due date agreed with the company (the buyer).
To access this type of financing, companies usually hire a third-party financial institution that applies a commission and an advance interest rate that will be paid by suppliers who want to advance payment in order to obtain liquidity on their outstanding invoices. The buyer will usually pay a fee to offer this payment system to their suppliers based on the number of suppliers, invoices managed and the amount of financing offered to them.
The biggest difference between Dynamic Discounting and Supply Chain Finance is where the cash comes from. In the Dynamic Discounting, the buyer who offers the early payment to his suppliers does it with its own cash, and no third party manages neither the cash nor the payment processes. On the other hand, in Supply Chain Finance there is a third party institution that intermediates and provides the capital to finance the suppliers’ invoices.
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