What is dynamic discounting?
Dynamic discounting is a supply chain finance solution that allows buyers to utilise their excess of cash to pay invoices early. Payment terms are often negotiated between the buyer and supplier to accelerate payments in return for a discount on the goods and/or services purchased. This allows the buyer to invest their cash at a favourable rate while suppliers get access to an alternative source of funding.
How does dynamic discounting work?
The dynamic discounting process always starts with negotiating the supply of goods and/or services between the buyer and the supplier. This typically includes payment terms and discounts for paying invoices before their maturity date, as well as the methodology to calculate discounts.
Upon the approval of invoices, the buyer can decide whether all or some invoices may be paid early in exchange for the discounted goods and/or services. This discount is dynamically calculated based on a method agreed between the buyer and the supplier, according to the number of days the settlement occurs prior to the original due date.
- Invoice is presented to the buyer by the supplier.
- Invoice is approved by the buyer.
- Buyer decides when to early pay the invoice.
- Based on commercial terms agreed, a discount is calculated and applied to the invoice value.
- Buyer proceeds with the early payment of the invoice. Invoice is closed and P&L benefit recognised.
What are the benefits of dynamic discounting?
There are multiple, mutual benefits for companies implementing dynamic discounting programmes with their suppliers:
Benefits for buyers
Strengthening supply chain: By injecting liquidity in its supply chain, the buyer can reinforce its relationships with their suppliers, contributing to the viability of their entire chain.
Low-risk return: By implementing Dynamic Discounting, the buyer can capture a return via the discount offered.
Improving operating profits: By paying suppliers early in exchange for a discount, the buyer can lower their cost for goods and services sold, improving their operating margin.
Benefits for suppliers
Alternative source of funding: By leveraging their buyer’s excess of cash, suppliers can free up their existing credit lines and have the opportunity to finance their invoices at a lower cost of funding.
Effective cashflow management: The access to early payment helps suppliers’ cash flow. This is because payments can be timed to suit their needs.
Secure revenue stream: By accepting a discounted price in exchange for favourable payment timings, suppliers can improve relationships with their customers, resulting in a more secure revenue stream.
The role of technology in dynamic discounting
Dynamic discounting is a solution that can provide tremendous benefits to all parties. However, operating a dynamic discounting programme is nowadays often facilitated by platform providers. They can provide straight through processing by automating procedures, reducing manual interventions. They can also provide real-time analytics to manage programmes.
Our dynamic discounting solution
Demica’s platform makes it simple to set up a dynamic discounting programme. From real-time analytics to seamlessly switching from dynamic discounting (i.e. buyer funding) to payables finance (i.e. bank funded), Demica can support you to make the most out of your working capital.