Automated Dynamic Discounting on the Rise

Since the 2000s, Dynamic Discounting has become a popular financial tool – and the rocky economic landscape of recent years has caused its popularity to grow even more. With many suppliers experiencing the financial strain of disrupted supply chains, the appetite for early payment solutions that help improve cash flow has increased. At the same time, many buyers are sitting on record levels of cash – about 45 percent more than they were five years ago.

Dynamic Discounting is an attractive win-win solution for buyers and suppliers alike. A growing number of businesses have adopted this solution to put their excess cash to work. By offering suppliers early payment in exchange for pricing discounts that reduce cost of goods sold (COGS), companies can make money from their uninvested capital.

How Does Dynamic Discounting Work?

Simply put, dynamic discounting 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 without having to change contractual payment terms. The “dynamic” part references the ability to vary the discount according to the date of early payment. Typically, the earlier a supplier elects to get paid, the larger the discount applied to the invoice.

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 those offered via the PrimeRevenue SurePay Platform, 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.

Differentiating Dynamic Discounting from Factoring

It’s important to note that dynamic discounting shouldn’t be confused with factoring, which is another liquidity solution commonly deployed by suppliers. Factoring allows the supplier 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 to the factor at a high discount to assure a positive cash balance.

At first glance, the buyer may not understand the impact this arrangement has on their own business. The reality is that most of the time, when a supplier is factoring its receivables based on high costs, the supplier will try to regain those expenses by charging the buyer more to begin with.

Unlike factoring, dynamic discounting is often a much more beneficial arrangement, allowing buying organizations to 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.

Dismantling the Complexities (and Costs) of Dynamic Discounting

Despite the obvious benefits to buyers and suppliers, some companies are hesitant to implement a dynamic discounting program – and understandably so. Historically, these and other early payment programs have come with a heavy resource burden, especially for small and mid-sized businesses that may not employ a deep roster of AP/AR personnel. As it is, on-time payment processing can be costly and resource-intensive enough. Adding an early payment program and affiliated tools to the mix can be overwhelming.

Fortunately, PrimeRevenue is easing these concerns. Our SurePay Platform is the first solution in the industry to consolidate on-time and early payment program administration (like dynamic discounting and supply chain finance) onto a single, easy-to-use platform. Because the SurePay Platform automates the payment process, both on-time and early payments are easy to execute and require minimal AP resources. Furthermore, it gives suppliers visibility into invoice approval and payment status. That means fewer supplier payment inquiries, fewer resources required to process payments, and a single payments solution (versus multiple) plus the benefits associated with suppliers having access to early payments and buyers reducing COGS.

The future of dynamic discounting – and B2B payments in general – can be summed up in one word: flexibility. Companies of all sizes (and SMBs in particular) need flexible payment solutions that simplify and streamline how they pay their suppliers. PrimeRevenue is the only provider that supports on-time payments alongside dynamic discounting, supply chain finance and accounts receivable finance on a common platform that allows companies to easily choose between self-funding and third-party funding from more than 100 financial institutions for their programs.