Receivable Savvy is taking a closer look at how supplier organizations take early payment on outstanding invoices. There are multiple early payment options to choose from in the form of supply chain financing, factoring, P-cards, static or flexible terms, and more. Early payment may also be initiated by the buying organization, the supplier organization or third-party solution providers. Today we’ll look at dynamic discounting, how it works, what it means for the supplier as well as the buyer, and identify some of the key providers in the space.
What is dynamic discounting?
Dynamic discounting involves offering a supplier a slightly reduced payment on outstanding invoices at a discount rate that fluctuates depending on the timeframe in which the invoice is paid. Because the discount rate depends on when the supplier chooses to accept payment, it’s akin to a sliding scale: the earlier the payment is taken, the higher the discount rate.
The buying organization will often directly finance the early payment to suppliers via a dynamic discounting mechanism, but third-party solution and funding providers have made headway in the space in recent years. In addition, the mechanism of dynamic discounting may be managed by a third-party while still being funded by the buying organization.
How it benefits the supplier organization
Dynamic discounting, when applied properly and strategically, can be a valuable financial tool for a supplier organization. Because suppliers want to be paid as quickly as possible, leveraging a dynamic discounting solution as part of the payment mix allows them to receive payment significantly faster in order to maximize cash flow and possibly fund organizational objectives such as plant expansion or acquisitions.
Supplier organizations also have the flexibility to decide which invoices they want paid early, exactly when they want to be paid and at what discount rate. If standard terms are 60 days and the supplier desires payment in five days after the invoice is approved, the discount rate could be 2.5% – 3%. If the discount rate is too high at five days for that particular invoice, they may opt for payment in 30 days at a discount rate closer to 1%.
When a supplier organization utilizes a dynamic discounting solution, it is usually via an automatic mechanism such as an online portal that allows them to see all outstanding and approved invoices. The supplier can then select which of those invoices to take early payment on. Why is automation important to suppliers? Historically, some buying organizations have taken an offered discount intended for five days while still paying at a 30 or 60-day interval. This may have been due to slow internal processes on the buyer side whereas the invoice is approved and payment made, but the discount timeframe has passed. Dynamic discounting, and the automation behind it, eliminates these occurrences.
Potential concerns for suppliers
When a buying organization is funding the dynamic discounting solution, that funding – and by extension the discount rate – may fluctuate based on the level of funding the buying organization decides to devote to the initiative. Furthermore, there may be differing discount tiers for different supplier groups or individual suppliers. One supplier may receive one particular discount rate while another may receive another based on their industry, size, invoice amount, etc.
How it benefits the buying organization
Although buyer organizations pay their suppliers early, they do pay less than the original invoice amount. At first blush, the discount rate (anywhere from 0.5% to 3%) may appear to be relatively small. The value is in the accumulation of these discounts over multiple invoices and suppliers through the course of the year that result in significant savings for the buyer. The discount may also be viewed as offering short-term loans to suppliers with a higher interest rate than the vendor might normally receive from a business loan or line of credit. But, the buying organization is able to offer almost immediate payment without the hassles typically associated with obtaining a loan or establishing a line of credit.
Buying organizations will often view these discounts as additional revenue added to the balance sheet. Plus, there is virtually no risk to the buyer since they already have the cash and are simply paying out less.
In essence, dynamic discounting can be a mutually beneficial transaction that offers significant benefit to suppliers hoping to receive cash early as well as to buyers who desire to pay a little less when satisfying outstanding invoices. In addition, because the mechanism is established in a way that automates the selection and payment, there is virtually no chance that the buyer will take the discount while still paying at term.
Major providers of dynamic discounting or similar solutions
Dynamic discounting has become an established early payment alternative and is now a reliable financing option for many suppliers. There are a number of players carving out market share and spreading the word about how it benefits both the supplier and buyer. Major players offering dynamic discounting or similar solutions include:
- C2FO https://c2fo.com/
- PrimeRevenue https://primerevenue.com/products/
- Taulia http://taulia.com/en/
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.