Dynamic discounting is an early payment process that benefits both ends of the supply chain, i.e., the supplier and the buyer.
Which buyer does not love discounts? Most of the discounts usually benefit the buyer. Have you heard of a discounting system that helps the supplier and the buyer? Dynamic discounting is one such system of discounts. Let us look at dynamic discounting, its process, and how it benefits both the supplier and buyer.
What is dynamic discounting?
Dynamic discounting is a system where a supplier offers discounts to a buyer depending on the payment dates. Dynamic discounting is a method of early payment wherein the buyer pays the supplier in advance before the agreed-upon dates in return for a discount on the invoice.
The discount is dynamic because it reduces as the invoice nears maturity under the original conditions. The “dynamic” aspect refers to the ability to alter discounts based on the dates when the supplier gets paid by the buyer.
To give you an idea, let’s assume that a supplier and a buyer have agreed upon an original payment term of 60 days. As per the dynamic discount conditions, if the buyer pays the supplier on day 20, the buyer would get a 3% discount. The buyer would get a 2% discount on day 40 and no discount on day 60.
What is the process behind dynamic discounting?
- The buyer buys services or products from the supplier.
- The invoice is uploaded to the dynamic discounting platform by the supplier.
- The invoice is approved for payment by the buyer.
- The supplier considers the discounts available for a variety of payment dates.
- When the buyer and supplier mutually agree to the rates of discounts on various dates, the discounts are automatically applied when early payment is made.
What are the benefits of dynamic discounting?
Suppliers and buyers are the two types of people who benefit from dynamic discounting. Let us look at how dynamic discounting benefits both the suppliers and buyers in a supply chain.
- Suppliers can control when and which of their authorized invoices are paid and the percentage of discount they get.
- It offers suppliers fast and straightforward access to cash, which boosts supplier relationships and the financial supply chain.
- Dynamic discounting enables more accurate working capital forecasts and growth planning.
- Suppliers who use dynamic discounting receive access to capital at a cheaper cost than other choices accessible to them, allowing them to handle unforeseen expenditures or invest in development and creativity.
- Using the versatile, dynamic discounting model, suppliers can finance a single invoice, multiple invoices, or every invoice.
- Instead of 1, 2, or 3 months dynamic discounting allows suppliers to receive money in a few days.
- Increasing working capital through early payments from buyers is usually more significant than higher profits, especially for smaller suppliers, as it is critical to their long-term operations.
- Suppliers can enhance their cash conversion cycle by obtaining early payment, which reduces their days’ sales outstanding (DSO).
- With complete integration between two ERP systems, the supplier can gain an advantage with buyer-side transparency of received invoices. They can even employ integrated settlement advice as value addition in their payment dashboard.
- Buyers can save millions by utilizing invoice discounts to pay less for products and services. The saved money can be invested for a higher return on investment.
- Offering early payment to consumers strengthens the supply chain for the buyer and decreases the probability of disturbances.
- Buyers are essentially investing their own money with dynamic discounting to get discounts. These convert into risk-free profits that are typically higher than the conventional investment gains.
- Dynamic discounting enables buyers to reimburse their suppliers in advance in return for a discount, allowing buyers to profit from double-digit, risk-free profits.
- Dynamic discounting increases the working capital of the sellers by giving choices for quick, versatile, and predictable access to cash. As a result, more sellers are motivated to do business with buyers, increasing the strength of the supply chain.
- Buyers gain a working capital advantage from sellers who do not settle for early payments when combined with a payment terms extension.
- When suppliers are given early payment and accessibility to a user-friendly system, buyers can improve their relationships.
- Buyers minimize the cost of the goods and services they acquire by leveraging the early payment discounts improving procurement KPIs.
The usage of dynamic discounting is on the rise because both the buyer and supplier benefit from it. A buyer and supplier partner use a dynamic discounting system to produce a fair, mutually advantageous partnership. It can also enhance the buyer-supplier relationship by increasing credibility.