Working Capital

Need Working Capital for Your Small Business? Try Dynamic Discounting

November 16, 2022
Talena Welsh and Kate Evans
A small business owner stands with his employees in their workshop.

If your business needs more money faster, unlock the power in your unpaid invoices. 

Too many up-and-coming entrepreneurs believe they need a bank loan in order to grow their operations. In reality, they should be using dynamic discounting to obtain the necessary working capital for their small business. 

Dynamic discounting is a type of early payment program, but unlike 2/10 net 30 and other static discounts, it encourages your customers to pay as quickly as possible. C2FO has created an industry-leading platform that makes it easier for large companies and their suppliers to use dynamic discounting. 

Generally speaking, the earlier your customers pay, the bigger their discount is. That’s an incredibly effective incentive, and it can lead to your company receiving payment in days instead of weeks or months, substantially boosting your cash flow. According to C2FO’s 2022 Working Capital Survey, 88% of companies utilizing dynamic discounting say they are satisfied with their current provider.

While dynamic discounting quickly produces working capital for small businesses, we’ll let you in on a little secret: Large enterprises like to employ it, too, because it reduces their days sales outstanding (DSO) and makes their financials look stronger.

Need more incentive to give it a try? Here are five reasons why dynamic discounting is a better source of working capital for small businesses. 

1. It’s a faster, less expensive way to access working capital

Small businesses often struggle to access traditional bank loans or lines of credit. They may not have the collateral or credit history necessary. As a result, lenders can’t or won’t approve their requests. 

According to the Federal Reserve’s 2022 Small Business Credit Survey of small employer firms, only 31% of surveyed businesses said they received all the funding they sought from lenders in 2021, the most recent year for which data is available. Even companies viewed as good risks met resistance: Only 39% received the full amount of funds requested. 

Dynamic discounting short-circuits that framework because you’re not asking a lender to take a risk and lend you money. Instead, you’re incentivizing your customers to pay you money that you have already earned in exchange for a small discount. And that discount is almost always less than the cost of borrowing money. 

Dynamic discounting can put money in your accounts much faster. Suppliers that use C2FO can receive payment on their invoices in as little as 48 hours. 

Compare that to the process of applying for a bank loan, which can take weeks or months. 

A business owner works on her laptop, learning about dynamic discounting.

2. It’s a risk-free source of working capital for small business

When you take out a loan or open a line of credit, there is always the chance that you will become overextended, fail to make payments and lose your collateral.  

With dynamic discounting, you don’t have to put up any collateral in the first place. You also don’t have to fill out a ream of paperwork or wait weeks to learn if you’ve been approved. 

But if you do need to seek a traditional loan, dynamic discounting can help, too, because — by accelerating invoices instead of borrowing money — there’s less debt on your balance sheet, making you more attractive to lenders when you do ask for a loan.

3. Dynamic discounting makes it easier to invest in your company’s growth

When you have more cash on hand, you will have a greater ability to quickly cover the cost of new equipment or other forms of business expansion. 

Because you have extra cash on hand — and you’re not terrified of running out of money — you could also take advantage of bulk discounts for making larger inventory orders. Or you could pay for slower but less expensive shipping options. 

Consistent use of dynamic discounting can help small businesses with inflation pressures.

4. It can help you push back against inflation

As we noted above, dynamic discounting allows you to receive payment on invoices much faster — in days, not months. You can then put that money back into your business immediately by purchasing inventory or materials before inflation pushes their prices even higher. 

By doing this consistently each month, you can stay ahead of inflation-driven price increases and protect your profit margins. (You may have heard this referred to as managing your cash conversion cycle.)

5. It increases your control and flexibility

At C2FO, suppliers are in control of which invoices they want to make available for early payment and dynamic discounting. You also decide the size of the discounts you offer. And unlike a factoring arrangement, where businesses are often required to “sell” their invoices, you retain control of your invoices and the customer relationship. 

Don’t need any extra cash? You’re under no obligation to use C2FO. But if you do need to increase your cash flow, you can quickly activate the program to speed up invoice payment, putting money in your bank account in days. C2FO also has Invoice Central, a feature that lets you see which of your invoices have been approved by your customer. 

The bottom line

Dynamic discounting offers businesses several benefits — faster payment, resources for growth, less risk, more flexibility — in exchange for a small discount that’s usually less than the cost of a bank loan. It’s a powerful way to boost working capital for small businesses that might not qualify for traditional lending products. 

Talena Welsh is a strategic supplier relationship manager at C2FO. Kate Evans is a supplier relationship manager at C2FO.  

Your enterprise customers might already be offering dynamic discounting to suppliers like you. See if any of them are part of the C2FO network!

Want to take control of your cash flow?

Early payment through C2FO can help.

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