A handy Guide to Dynamic Discounting and Supply Chain Finance - CredAvenue

Strong business relationships are the foundation of a successful business. Buyers and suppliers cannot succeed and grow exponentially if they do not have each others’ back. Good relations ensure timely delivery of goods and/or services, which in turn help meet customer expectations.

While there are many ways to strengthen ties between buyers and suppliers, transparent and quick invoice payments are especially valuable. Punctual invoice amount payments from the buyers’ end can help suppliers with timely deliverables. Buyers can use the capital within the account or opt for early payment solutions to help their suppliers with invoice payments. Concentrating on the latter, here is a detailed guide for when it comes to dynamic discounting and supply chain finance.

 

What is dynamic discounting?

A closer examination of the term gives insight into this early payment solution. Dynamic discounting is a dynamic solution that allows buyers to avail themselves of discounts by clearing their invoices early. Suppliers, meanwhile, benefit from the early payments, which they can use to scale up their business.

In dynamic discounting, suppliers receive the invoice payment soon after the buyer approves the invoices. The earlier the buyer settles the payment, the more discount they can get. However, it is up to the suppliers, not the buyers, to decide which invoices to accelerate for payment. Suppliers can choose the invoice they want to receive early. They also have the freedom to choose how soon they want it to be paid.

But, that does not mean buyers only benefit from discounts through dynamic discounting. Here is a guide to the potential benefits of dynamic discounting for both the buyers and suppliers.

 

  • Benefits for buyers

  • Increased profitability: Early payment discounts on goods and/or services often provide a larger return than potential interest earned.
  • Reduced expenses: The discounts on buying the goods and/or services reduce costs, which helps strengthen buyers’ margins.
  • Better supplier relations: Early payment can strengthen supplier relations for buyers, which bodes well for the future.


  • Benefits for suppliers

  • Source of low-cost funding: Dynamic discounting is the best way for suppliers to access funds. It is more affordable than other sources of financing, which include bank loans.
  • Control over cash inflow: As suppliers have the freedom to dictate the payment date, they can control their cash inflow. It can help meet working capital requirements, expansion plans, or other financial needs.
  • Control over invoices: Dynamic discounting is a unique solution for suppliers, as it allows them total control over their invoices. They can decide which invoices they want to get funded.

 

What is supply chain finance?

Trade finance and supply chain finance are often confused as the same. However, there is a fine line of difference between them. The most significant difference between trade finance and supply chain finance is their use. The former is used more often when the buyers and sellers do not know each other, while supply chain finance is preferred by buyers and sellers who have a history of working together.

In supply chain finance, the invoice payment is settled by a third-party supply chain finance provider and not the buyer. It is the fundamental difference between supply chain finance and dynamic discounting. As soon as the buyer approves a supplier invoice, the third-party financer pays the supplier. The buyer pays the financier back at a later date.

Like dynamic discounting, supply chain finance also offers unique benefits to buyers and suppliers. A few of these are mentioned below.

 

  • Benefits for buyers

  • More time to increase cash flow: When buyers approach the best supply chain finance providers, they offer better repayment terms. It helps buyers improve their cash flow.
  • Strengthens supplier relations: Early payment is always welcome in business. By paying invoices early, buyers can improve their supplier relations.
  • Optimized working capital: In exchange for getting paid early, suppliers extend payment terms. This leads to an increased DPO (Days Payable Outstanding).


  • Benefits for suppliers

  • Access to low-cost capital: Invoice payments received through supply chain finance startups, such as Yubi, is an affordable way for suppliers to access funds. They do not have to pay any interest or fee, which is the case with bank loans and other means of raising funds. Platforms like YubiFlow additionally offer end-to-end digital processing, which saves time.
  • Improves cash flow: Cash flow is valuable for any business. By gaining access to invoices soon after they’re approved, suppliers can benefit from improved cash flow and mitigate the risk of delayed payments and improve efficiency.

 

Dynamic discounting or supply chain finance: which is better?

It is not always right to compare two similar solutions. The same goes for dynamic discounting vs supply chain finance. Both are unique offerings that can help businesses at different stages in their journey and have a different outlook towards the products.
Dynamic discounting is suitable for companies with substantial cash reserves. It can help them earn valuable discounts, which translates to a decent return on capital. Meanwhile, supply chain finance works better for companies running low on funds. Supply chain platforms like YubiFlow are especially helpful, as they provide access to a large pool of investors and enable companies to quickly access funds through a digital approach.

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