Discounting has been static … until now
Dynamic discounting represents a significant step forward for an age-old practice. Discounting, where suppliers can be paid early by their buyers in exchange for a discount on the goods or services they provide, has been around since the beginning of business. Making the process dynamic allows for a variable cost, the amount of discount for early payment depends on how many days prior to the original due date the payment will be received. The earlier the payment is received, the higher the cost to the supplier. These programs can help buyers reduce their cost of goods or services while providing suppliers access to affordable working capital.
Dynamic Discounting is often contrasted with traditional static discounting programs where a buyer effectively offers two payment options: 100% payment at the full term of the invoice or a discounted amount on a fixed date. Both the discount and timing of early payment are generally prescribed by the buyer and presented as a “take-it-or-leave-it” option to the supplier.
Not all Dynamic Discounting programs are “dynamic”
Most Dynamic Discounting programs operate as a linear-static model where the buyer offers early payment based on a fixed APR, which then determines the size of the discount based on the number of days paid early. In these programs a supplier still only has control over accepting or declining the buyer’s set rate for early payment. The amount of the discount is determined along a fixed line and is set by how early the supplier is paid. All suppliers pay the same rate, and the most crucial flaw in Dynamic Discounting or static discounting is they are buyer push. The buyer is the only one making an offer, and there is no supplier pull. Therefore, Dynamic Discounting is really not dynamic at all since the only variable in play is the number of days paid early.
Truly dynamic is better for both buyers and suppliers
The next stage of Dynamic Discounting is an exponential leap forward where there is flexibility across many variables and the supplier is in better control. Numerous parts of the equation including when the early payment will be received, what APR rate is desirable for the supplier, how much early payment is requested, and how often a supplier uses the program can be adjusted. Instead of presenting a single option for early payment (static discounting) or trying to put all companies into a single, fixed line with no possibility of variation (legacy programs), true Dynamic Discounting incorporates all these factors and allows for a buyer and a supplier to determine the optimal price and timing of early payment.
When all the variables that determine the optimal pricing for early payment are considered, the end result is a working capital marketplace model that delivers more income to buyers and more attractive rates to suppliers as opposed to a static model that places serious limitations on all parties. Welcome to C2FO.