Working Capital

Complete Guide to Dynamic Discounting

January 4, 2019

Dynamic discounting is the evolution of an age-old practice.

Static discounting, where suppliers can be paid early by their buyers in exchange for a fixed discount on the goods or services they provide, has been around since the beginning of business.

A dynamic discounting model allows for variable cost and timing. This “always-on” process allows suppliers to provide a discount in real-time when they need cash flow.

Unlike static terms, early payment through dynamic discounting could occur six days early or 60, depending on payment terms. The early payment window of time is available throughout the entire payment term — on-demand as suppliers need it.

The second variable of dynamic discounting is cost. With a static discount, the cost is fixed upfront at a single point of negotiation.

With a dynamic approach, the cost can vary along a sliding scale or be more dynamic, depending on the model used.

Dynamic discounting is often contrasted with traditional static discounting programs where a buyer effectively offers two payment options: 100% payment at the full term of the invoice or a discounted amount before a fixed date.

Both the discount and timing of early payment under static discounting are generally prescribed by the buyer and presented as a “take-it-or-leave-it” option to the supplier.

How dynamic discounting is different from static discounts:

  • Suppliers can request early payment at any point once an invoice is approved
  • The timing and price of the discount can vary
  • Dynamic discounting offers greater flexibility and control for suppliers
  • The dynamic model decreases ad hoc requests for early payment and increases the effectiveness of a discount program

Why “static” discounts are not as effective as dynamic discounts:

  • Suppliers can plan for standard discounts in their pricing
  • The static model limits the window in which suppliers can request a discount
  • The cost of the discount is a “take it or leave it” option for suppliers
  • The option may not be available or affordable when suppliers need cash flow the most
  • Static discounts can lead to ad hoc requests for payment that disrupt your AP process

Comparing traditional and sliding discounts

With a linear or sliding scale discount, cost savings are generated by a fixed discount rate times the number of days paid early, much like an APR on lending.

The timing of the discount can vary, but the cost is fixed and determined by the buyer.

This model is also called “buyer push” as a supplier only has control over accepting or declining the buyer’s set rate for early payment.

Limitations of linear or sliding scale discounts

  • While timing is variable, the cost is fixed and determined by the buyer
  • The discount is predictable and does not allow for real-time changes in what suppliers can afford
  • The “buyer-push” approach limits the potential cost savings for buyers

A newer approach to dynamic discounting is a marketplace model. With an always-on marketplace, both price and timing are fully dynamic, but suppliers initiate an offer for a discount and control the rate of discount.

They also choose which invoices they want to accelerate payment on and if, and when, they want to participate in the program.

When suppliers can control the discount option, it becomes more affordable and flexible than other cash flow options.

This value creates a program that suppliers can rely on to run their business.

Marketplace dynamic discounting takes into account:

  • The number of days paid earlier than a supplier’s payment terms
  • The rate offered by the supplier
  • The value of all the offers made by participating suppliers at a given time
  • The cash your company or a third-party makes available to fund early payment
  • How all supplier offers—when combined—will deliver the desired return

How dynamic discounting with C2FO works

Different dynamic discounting solutions will vary when it comes to ease-of-use, and whether a supplier can control the rate of discount.

For the marketplace model—which is only available through the C2FO platform—this is how dynamic discounting works, both for suppliers and buyers.

How marketplace dynamic discounting works for suppliers:

  1. Review invoices (your customers have already uploaded your invoices).
  2. Make your selection of which invoices to discount.
  3. Set a discount rate for early payment.
  4. Receive payment — if accepted, your customer releases payment.

How marketplace dynamic discounting works for buyers:

  1. Approved invoices are automatically uploaded to the C2FO platform.
  2. Suppliers log in, choose which invoices they want to be paid early, and set an offer for a discount.
  3. The C2FO platform matches supplier offers and your desired rate of return automatically.
  4. Your ERP is updated with discount and new pay date with no change to your current process.
  5. You still pay your suppliers directly, only faster.

Dynamic discounting vs. supply chain finance

Dynamic discounting is sometimes confused with supply chain finance. But the two are different in crucial ways.

Traditional supply chain finance, or reverse factoring, is often a bank-led solution. Buyers partner with a bank to offer early payment to suppliers.

The banks require complex underwriting on every supplier who uses their program. This means only the largest Tier 1 suppliers — generally 20 percent or less of a supplier base — have access to this form of early payment.

While SCF generates revenue for the bank and helps these large suppliers, supply chain finance doesn’t produce any cost savings for the buyer.

More importantly, the early payment needs of 80 percent of suppliers are unmet.

Other differences in dynamic discounting solutions

Dynamic discounting solutions also vary in ease-of-use, the simplicity of implementation, scalability and the services provided as part of the solution.

When evaluating a dynamic discounting solution, consider the following:

  • Ease and speed of implementation
  • Compatibility with your ERP system and its license terms
  • GDPR and privacy compliance
  • The languages, currencies and regions supported
  • Demand on your internal IT team
  • Time-to-value
  • Security
  • Support services
  • Year-over-year growth
  • Supplier adoption, participation, and satisfaction
  • Program performance

Want to take control of your cash flow?

Early payment through C2FO can help.

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