For the past several years, Dynamic Discounting has been garnering increasing interest among buying organizations that have large amounts of cash sitting dormant in their bank accounts with little returns. There is also increased appetite to provide suppliers early payment solutions to improve their own cash flow. Dynamic Discounting is an attractive win-win solution for buyers and suppliers alike. An increasing number of corporations have adopted this solution to put their capital to work, offering suppliers early payment in exchange for pricing discounts that reduce cost of goods sold (COGS).
How Does Dynamic Discounting Work?
Simply put, this solution provides an arrangement between the buyer and its suppliers whereby payment for goods or services is made early in return for a reduced price or discount. Dynamic discounting provides the ability to vary the discount according to the date of early payment. Historically, traditional dynamic discounting solutions have utilized exorbitantly high discount rates, which can make the arrangement expensive for suppliers. Fortunately, that’s changing. New generation dynamic discounting solutions, like PrimeRevenue’s, offer competitive, lower discount rates that are more in line with the rates offered via supply chain finance. This makes dynamic discounting a more attractive way for suppliers to accelerate cash flow and buyers to capture early payment discounts.
Dynamic Discounting versus Factoring
For many suppliers, factoring has become a popular method for financing the business. Factoring allows the seller to get paid a certain amount against its accounts receivable or invoices by a third party, known as the factor. The factor then steps into the buyer-supplier relationship and fronts the cash. The invoices are sold at a high discount to assure a positive cash balance. At first glance, the buyer may not understand the impact on their own business from this arrangement. However, the reality is that most of the time, when a supplier is factoring its receivables based on high costs, the company will try to regain those expenses by charging the buyer more to begin with. Dynamic Discounting is often a much more beneficial arrangement, allowing buying organizations self-fund the early payment financing rather than using third-party capital. As a result, both the buyer and its suppliers can bring money back into the supply chain, improve relationships and minimize exposure to financial risks. An added bonus is the discount received from suppliers replaces income earned by investing surplus treasury funds, which can be considered a risk-free return.
Alternative Solutions that Benefit the Entire Financial Supply Chain
Dynamic discounting isn’t the only cost-effective solution that allows suppliers to accelerate payment on invoices and buyers to unlock working capital across the supply chain. Buyers that want to leverage the power of trade finance can complement their self-funded dynamic discounting programs with supply chain finance, also known as supplier finance or reverse factoring. Supply chain finance utilizes third-party funding instead of the buyer’s balance sheet. PrimeRevenue is the only provider that supports both supply chain finance and dynamic discounting on a common platform, allowing companies to easily choose between self-funding and third party funding from more than 100 financial institutions for their programs. Both solutions are powerful working capital solutions that benefit both sides of the supply chain.
