Dynamic Discounting

This offering gives suppliers a more flexible way to get paid early and increase cash flow.

Dynamic discounting expands on the age-old practice of discounting invoices in exchange for early payment. This strategy incentivizes buyers to pay earlier by scaling the discount amount according to the payment date.

What is dynamic discounting?

Dynamic discounting, an early payment solution, allows suppliers to offer buyers a small discount in exchange for early payment. Early payments give suppliers a cash flow boost, fueling the working capital needed to operate and grow.

Suppliers have offered buyers a discount in exchange for early payment for years, but dynamic discounting provides a more flexible spin on early payment discounting. Traditionally, early payment discounts are offered statically. Buyers can either pay 100% of the invoice amount at its full term or accept a fixed discount if they pay within a set time frame. (For example, buyers receive a 2% discount if they pay within 10 days of receiving an invoice.) This often results in suppliers increasing prices to offset discount costs, which benefits neither party.

Dynamic discounting improves on this method by allowing the buyer to pay at any time within the payment term. The discount amount is adjusted accordingly, based on how early the buyer pays. The earlier the payment, the bigger the discount. 

Here’s how this approach typically works:

  1. Buyers engage with dynamic discounting providers to implement a program, such as C2FO’s Early Payment program.
  2. Once approved, buyers upload suppliers’ outstanding invoices to an online platform.
  3. Suppliers log in to view the outstanding invoices, set desired discount rates and request early payment for selected invoices.
  4. If accepted, buyers receive a discount reflecting the payment date and suppliers receive the discounted payment in as little as 24 to 48 hours.

With dynamic discounting, the discount rate is expressed as an annual percentage rate (APR). This allows the platform to automatically calculate the discount based on the number of days the buyer pays early.

Unlike other early payment solutions, such as invoice factoring or supply chain financing, dynamic discounting excludes a third-party lender. Instead, the buyer uses its own working capital to fund early payment. The only cost to the supplier is the discount amount. Many buyers combine supply chain financing with these programs. Generally, a buyer would use dynamic discounting when it has enough cash to fund early payment itself and supply chain financing when it needs to hold on to working capital.

Dynamic discounting vs. supply chain finance

Dynamic discounting Supply chain finance
Used when buyers have cash on handDoes not require buyers to borrow fundsSuppliers choose which invoices to accelerate Used when buyers want to offer early payment but need to conserve cashEarly payments are funded by a bank or third party, based on the strength of buyers’ creditOften requires a minimum number of accelerated invoices, although C2FO’s program remains fully flexible

Why is this important?

Dynamic discounting gives suppliers an easy way to access working capital so they can address inconsistent cash flow and invest in growth opportunities. For small to midsize suppliers struggling to qualify for or afford traditional working capital finance solutions, dynamic discounting programs offer a cost-effective solution. Without the same qualification requirements for suppliers, dynamic discounting serves as a form of working capital financing that is more inclusive and accessible for small to mid-sized businesses.

The benefits of dynamic discounting

  • Increase working capital. It gives small to midsized businesses the working capital needed to finance business operations and growth.
  • Access affordable financing. With dynamic discounts, suppliers can usually finance working capital at a much lower cost than traditional financing options. 
  • Gain more control over cash flow. Unlike other early payment solutions, suppliers can choose which invoices to accelerate, determine the discount cost and forecast cash flow more accurately.
  • Strengthen buyer relationships. Early payment programs such as C2FO’s benefit both buyers and suppliers, strengthening supply chains and helping buyers reduce their cost of goods sold.