Dynamic Discounting vs. Factoring - CredAvenue

What is Dynamic discounting? 

A financial solution that provides suppliers with the flexibility to take payments earlier than the payment date in exchange for a small discount is dynamic discounting. The term “dynamic” in dynamic discounting refers to the option to vary the discounts based on payment dates to suppliers. It allows the suppliers to reach the correct balance between cost and payment date. Usually, the earlier the payment is made, the greater the discount.

Benefits of Dynamic discounting

  • A win-win situation: Dynamic discounting benefits both the trading partners and improves relationships all through the supply chain. While the buyers gain early payment discounts that decrease COGS (Cost of Goods Sold), improve margins, and earn a good return on liquidity, the suppliers benefit from the flexibility of discounting a few/all their receivables.

 

  • Better financial solution: Dynamic discounting allows suppliers to be paid earlier than the invoice maturity, at more attractive terms than other methods such as asset-based lending or factoring.

 

What is Factoring?

Factoring is a financial solution when a company buys a debt or invoice from another company. It is, to an extent, a form of invoice discounting in many markets. In this purchase, accounts receivable are discounted to allow the buyer to profit upon the debt settlement. In factoring, transfer of the ownership of accounts to another party takes place that then chases up the debt. It thus relieves the supplier of a debt for less than the total amount by providing them with working capital to carry on trading while the buyer, or factor, chases up the debt. 

 

Factoring is not a loan because the parties neither issue nor acquire debt as part of the transaction. Rather, the funds are supplied to the company in exchange for the accounts receivable and are not subject to any limitations regarding use. Exporters commonly use factoring to accelerate their cash flow. By this process, the exporter can draw up to 80% of the sales invoice’s value at delivery of the goods & when the deals invoice is raised.

 

Benefits of Factoring

  • Improves working capital: A company selling its receivables gets upfront cash, which improves its working capital. Selling all or a part of its accounts receivables to a factor can prevent a cash-strapped company from defaulting on its loan payments with a creditor, such as a bank.

 

  • Helps business grow: Although factoring is a pretty expensive form of financing, it can help a company improve its cash flow. Companies where converting receivables to cash takes a long time, and those companies growing fast & requiring funds to take the edge of new business opportunities can immensely benefit.

 

  • Benefits factoring companies: Factoring companies benefit as well, as the factor can buy uncollected receivables/assets at a discounted price in a swap for supplying cash upfront.

 

The Comparison: Dynamic discounting vs. Factoring 

Factoring & dynamic discounting provide access to funds by discounting invoices, but they differ in how they operate and in some other aspects. The table below is a comparison between both dynamic discounting vs factoring.

 

Dynamic discounting Factoring
  • With dynamic discounting, you will receive more of your money. You receive 100 per cent of each invoice – minus a small discount is paid to the supplier when they advance payment on their receivable.
  • Maintain full ownership of your invoices
  • You receive the total amount of your invoice upfront, minus the discount.
  • With Dynamic Discounting, the cost is centered on open invoices with your customers
  • Factoring an invoice is selling it to a third party at a discount for the immediate payment of 70%- 90% of the invoice amount.
  • In factoring, transfer of the ownership of accounts to another party takes place, which then chases up the debt.
  • After the customer pays the invoice, the factor then pays you the remaining balance of your invoice minus the fees.
  • Factoring price is determined by the customer’s credit profile (debtor’s) portfolio.
  • Payless fees
  • 3%- 18% APR, making dynamic discounting economic
  • Pay more fees. Factors charge a flat-rate invoice fee of 1% to 4% and charge interest based on the time between the factor buying the invoice and the customer paying the invoice.
  • APRs above 30% usually, thus making factoring invoices one of the most expensive ways to improve cash flow.
  • With Dynamic Discounting, there is no advance rate. Rather than waiting for the additional amount due, you can have your customer pay that invoice early, this will release your remaining funds and give you an immediate boost in cash flow.
  • Some customers might not offer an early payment program, such that some of your invoices might not be available to convert instantly into cash flow. Factoring is then considered a more useful option.  
  • With dynamic discounting, you have access to funds in 24-48 hours
  • With factoring, you have access to funds in 2-7 days

 

Why is a Supply-chain Financing Platform right for You?

An end-to-end Supply-chain Financing platform like YubiFlow (by Yubi) brings in the benefits of increased efficiency, lower risk, and advanced monitoring options for you. YubiFlow is India’s biggest supply chain finance platform with a large pool of anchors and investors. It is the most advanced and innovative platform built to provide multiple solutions from Vendor Financing to Dynamic Discounting & Factoring. 

 

The platform offerings include:

Dynamic Discounting

  • Vendor invoice prepayment via the investible surplus from anchor

Factoring (Off-balance sheet structures)

  • Receivable finance solution for anchors
  • Vendor factoring & TReDS

 

 

FAQs-

Q: What are the advantages of Dynamic discounting in comparison to Factoring? 

A: Though both factoring and dynamic discounting provide access to capital by discounting your invoices, a comparison of dynamic discounting vs. factoring show that with dynamic discounting you:

  • Obtain the total amount of your invoice upfront, minus the discount
  • Retain full ownership of your invoices
  • Pay considerably less in fees

 

Q: When does Factoring have the edge over other financial solutions?

A: Factoring has a slight edge over other financial solutions when some of your customers do not offer an early payment program, which means that some invoices may not be available to convert immediately into cash flow.

 

Q: What are the two types of factoring?

A: Two types of factoring: non-recourse factoring and recourse factoring. 

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