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Supplier sends an invoice to the Buyer as usual without any change to their normal process
Dynamic discounting is a solution that enhances a buyer’s profitability by reducing its Cost of Goods Sold (COGS). Dynamic discounting gives the buyer’s vendors the flexibility to choose when they would like to get paid in exchange for a reduced price on the goods and/or services purchased. The “dynamic” component refers to the option to vary the discounts based on the dates of payment to suppliers. In most cases, the earlier the payment is made, the greater the discount.
How does it work?
Dynamic discounting is typically applied on an invoice-by-invoice basis, with the discount generally expressed as a percentage of the face value of the invoice. Buyers generally use their own balance sheet, or excess cash, to “fund” the program and generate the purchasing discounts, thereby generating a greater return on those funds than if they were held in an interest-bearing account.
Dynamic Discounting on the PrimeRevenue Platform
Who benefits from dynamic discounting?
Dynamic discounting is a true win-win solution that benefits both trading partners. Not only does this solution strengthen each party’s financial health, it also improves relationships throughout the supply chain.
Buying organizations can put their excess cash to work to gain early payment discounts that decrease COGS, improve margins, and earn a high yield return on liquidity. Suppliers benefit from the flexibility of discounting some or all of their receivables.
For suppliers, dynamic discounting provides the flexibility to be paid earlier than the invoice maturity, often at more attractive terms than alternative methods such as asset-based lending or factoring.
How Dynamic Discounting Differs from Other Solutions
- It is not factoring – With our solutions, 100 percent of each invoice – minus a small discount – is paid to the supplier when they advance payment on their receivable.
- It is different from traditional discounts – Dynamic discounts are calculated as a function of the time of payment. This eliminates the issues of static terms, such as 2%, 15, Net 30, where the buyer is no longer entitled to a discount if the invoice approval takes more than 15 days.
- It is not the same as supply chain finance – Dynamic discounting and supply chain finance are two different solutions for financial supply chain management. The main two differences are:
- The funding for the solution. In a dynamic discounting solution, the buyer finances its suppliers’ early payment. In supply chain finance, also known as reverse factoring, the buyer uses third-party funding to finance early payment (although PrimeRevenue also offers a self-funded supply chain finance option).
- The financial benefit for the buyer. Dynamic discounting improves a buyer’s profitability by reducing COGS, whereas supply chain finance improves a buyer’s working capital by optimizing payment terms.
Read more about the difference between dynamic discounting and supply chain finance here.
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