CredAvenue – Dynamic Discounting
Our SCF platform helps all your dynamic discounting needs!
What is Dynamic Discounting?
Dynamic discounting is a flexible payment system wherein the supplier offers the buyer several options for making early payments in exchange for discounts on the invoice. Consequently, the supplier gains access to funds at a much lower cost than any other funding option. It results in better working capital management, and the supplier is able to invest in growth and innovation. On the other hand, the buyer enjoys an attractive return on the excess cash.
The concept of early payment discounts to support working capital management is nothing new. However, the payment terms used to be rigid in the past. For example, 3/10 net 30, wherein the supplier offers the buyer a 3% discount if the invoice is paid within ten days. However, there is no discount available if the payment is made on the 11th or 20th day, which is well before the 30-day deadline. So, the buyer has no incentive to pay between the 11th and 30th day.
Under dynamic discounting, the supplier can offer far more flexible payment options, allowing the buyer to pay at any time between the invoice date and the agreed payment term: the earlier the payment is made, the greater the buyer’s discount. For example, if the payment term is for 30 days, the supplier may agree to offer a 3% discount if the payment is by day 10, a 2% discount by day 20, and a 1% discount by day 25. So, the buyer has an incentive to pay at different times until the 25th day under this model, a flexibility that is beneficial for the buyer as well as the supplier.
Benefits of Dynamic Discounting
Both buyers and suppliers enjoy the benefits of dynamic discounting in many different ways.
✓Under dynamic discounting, the buyers effectively invest their excess cash in availing the discounts, which are often higher than the returns earned on traditional investment instruments.
✓The early payment discounts reduce the cost of the goods and services purchased, which positively impacts the income statement of the buyer.
✓These early payments offer to strengthen supply chain health, reduce the likelihood of any disruption, and help develop a long-term business relationship.
✓These early payments help suppliers reduce their receivable period and improve their cash conversion cycle.
✓Under dynamic discounting, the suppliers can access funding at a cost that is lower than any other funding options available to them, enabling them to invest in growth and innovation.
✓Suppliers can influence the buyers’ payment pattern using attractive offers, based on which they can forecast the future cash flows and plan well in advance.
How Does Dynamic Discounting work?
Typically, dynamic discounting is applied on an invoice-by-invoice basis. The discount is usually expressed as a percentage of the dollar amount captured in the invoice. The buyers tend to use the excess cash to pay the invoice before the payment term in order to avail the discounts.
Now, let’s look at the steps involved in the working of dynamic discounting:
✓The buyer purchases goods/ services from the supplier.
✓The supplier prepares the invoice and sends it across to the buyer.
✓The buyer verifies and then approves the invoice for payment.
✓The supplier offers various discounts for a range of payment dates.
✓The buyer specifies funds available for early payments and expected discounts.
✓The supplier selects a discount offer and receives the payment on the chosen date.
By now, we have seen that dynamic discounting is an excellent option for trading partners. However, the option can become painless and straightforward with the help of an experienced supply chain finance platform like CredAvenue. Under CredSCF, an end-to-end trade and supply chain platform, the dynamic discounting product allows the buyers to pre-pay the vendor invoice from their investible surplus at the click of a few buttons.
CredSCF is a corporate credit rating-agnostic innovative platform that offers multiple solutions, right from vendor financing to dynamic discounting. Its added advantages include automated invoice processing, payment gateway integration, and core bank integration. You can select the products that suit your requirement and get connected to cash-rich anchors from multiple sectors to solve the issue of working capital management.
How does CredSCF work?
Suppliers and buyers get connected through the online platform. Then, the buyers specify how much capital they can afford for early payments and the discount they wish to get. Once the buyers and the supplier agree on a particular discount offer, they are automatically invoked on the chosen date.
Do suppliers need to offer early payment discounts on all invoices?
No, there is no obligation to offer discounts on all invoices, and the suppliers can decide on early payment offers on an invoice-by-invoice basis.