Dynamic Discounting

If you run any business, you must know how companies use payment terms as a financial instrument to manage funds. Payment terms are often extended, which means the invoices are paid late, leaving the suppliers’ cash flow position stretched. If these capital shortages happen frequently, the mightiest suppliers may be forced to bow down.

Many businesses intend to invest in their organisation but cannot do that because of delayed invoice payments, which limits business growth. This is where dynamic discounting comes in as a sigh of relief for distressed suppliers.

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What is Dynamic Discounting?

Dynamic discounting is a flexible payment system wherein the supplier offers the buyer 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.

Early payment discounts to support working capital management are 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 solution, 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 is incentivised to pay at different times until the 25th day under this model, flexibility that benefits both the buyer and the supplier.

Our SCF Platform helps all Your Dynamic Discounting Needs!

Dynamic Discounting on the Yubi Platform

Dynamic discounting is usually used on an invoice-by-invoice basis. The discount implies the percentage of the face value of a particular invoice. Buyers typically utilise their excess cash or balance sheet to finance the program and bring about purchasing discounts. As a result, it generates an improved return on such funds compared to an interest-bearing account.

Upload Invoice

Buyers receive an invoice from sellers without altering the normal procedure.

Set Discount Rate

The buyer approves and gives consent for the invoice. Buyer uploads the crucial invoice data like credit/debit memos, payables, etc., for discount negotiation to the Yubi platform.

Supplier Request

A supplier can choose early payment discounts on the chosen invoices at any time or fix automated early payments in the present capacity.

Invoice Payment

If early payment is accepted, the buyer pays the seller the entire invoice amount after deducting a discount the following business day. Or else, the payment is accepted at invoice maturity.

Distinctive Features

The buyer creates a dynamic discounting program, requesting sellers to participate. However, it depends on the seller to accept the request and be a part of the dynamic discounting program. In case some sellers want to participate and have been on boarded, a request for quick payments on the sanctioned invoices.

Additionally, sellers can choose individual invoices or set parameters to apply to invoices installed in the technology platform automatically. After that, the sellers appeal for an earlier payment date, anytime between the invoice due date and invoice approval.

Not to mention, the discount rate will be determined and applied depending on the original payment date.

Buyers can describe the available payment and liquidity schedules. The discount is considered dynamic since it is modified depending on the number of days till the due date of the invoice. After that, the buyer can block the particular calendar days when early payment cannot be conducted. The discount is specified as per the buyer or seller:

Buyer specified:

The buyer incorporates a fixed ADR (Annualised Discount Rate) for distinct sellers or seller groups.

Seller specified:

Seller provides the preferred ADR quotes on a transactional basis to the buyer for approval or rejection.

Note: A financial institution or bank does not offer funds in dynamic discounting solutions. However, banks or financial institutions are important in assisting buyer payments to sellers and offering the technology platform.

Parties

The parties involved in a dynamic discounting solution are the buyer and the seller.

  • Buyer specified:

    The buyer creates the dynamic discounting program and requests the sellers to participate.

  • Seller specified:

    An entity that sells goods and services to a buyer. A seller gives his consent to a buyer’s dynamic discounting arrangement to get optional early optional payments at a discount.

Contractual Relationships and Documentation

  • The commercial agreement between the seller and buyer for the supply of goods and services. Such contracts generally include fixed payment terms and may state the process for determining dynamic discounts.
  • The terms and conditions of using the agreement for accessing the dynamic discounting technology platform.

Security

Dynamic discounting works by using the buyer’s available cash while reimbursing the sellers. Since the program uses the cash available to the buyer, collateral is not needed. It eliminates the need for any security requirements.

Risks and Risk Mitigation

The seller speculates buyer default risk. On the other hand, the buyer speculates non-performance risk of the seller via their commercial dealings that exists regardless of the dynamic discounting solutions.

Since the buyer is paying the seller with its funds, there is no vital risk in solutions with dynamic discounts.

Transaction Illustration

  •  A technology platform usually assists in dynamic discounting. This platform can be included in the ERP system of the buyer.
  • Under the present supply chain provisions, the seller organises and sends the goods and generates invoices to the buyer.
  • The buyer accepts and allows the invoices. The invoices are then uploaded and added to the dynamic discounting platform.
  • Sellers get platform access to see the sanctioned invoices and to choose any invoices for instant early payment in the future.
  • If an invoice is chosen for early payment and the buyer has funds for such a payment, then the invoice is paid by the seller at a discount.
  • The discount rates are decided between the sellers and the buyers.
  • The buyer analyses the liquidity availability along with the seller limit management.

The buyer handles its program with no bank funding

Benefits of Dynamic Discounting

Both buyers and suppliers enjoy the benefits of dynamic discounting in many different ways.

Buyers

Under dynamic discounting, the buyers effectively invest their excess cash in availing the discounts, 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.

Supplier

These early payments help suppliers reduce their receivables and improve their cash conversion cycle.

Under dynamic discounting, the suppliers can access funding at a lower cost than any other funding options available, enabling them to invest in growth and innovation.

Suppliers can influence the buyers’ payment patterns using attractive offers, based on which they can forecast future cash flows and plan well in advance.

How Marketplace Dynamic Discounting Works For Suppliers

  • Enables the seller to authorise internal credit limits on the buyer that can open doors for more business with the buyer.
  • Lessen Days Sales Outstanding via quicker conversion of the receivables into cash that may be arranged for other requirements.
  • Use the working capital available at a lower cost compared to other financing choices.
  • Accessing automated onboarding methods via dynamic discounting technology providers enables the onboarding of small suppliers. The onboarding of such small suppliers under the Payable Finance programs is expensive and not feasible.
  • Ability to appeal early automatic payment of all the invoices after complete approval to payment.

How Marketplace Dynamic Discounting Works For Buyers

  •  Introducing available cash in the supply chain to get discounts can provide a promising and risk-free yield on funds.
  • Adding liquidity to the supply chain can reinforce seller associations and add to the stability and feasibility of the supply chain.
  • Ability to leverage early payment discounts to the invoice due date, increase savings, and generate a better operating profit.

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 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.

Why is Dynamic Discounting for You?

We have seen that dynamic discounting is an excellent option for trading partners. However, the choice can become painless and straightforward with the help of an experienced supply chain finance platform like Yubi. Under Yubi Flow, an end-to-end trade and supply chain platform, the dynamic discounting software allows the buyers to pre-pay the vendor invoice from their investible surplus with a few clicks.

Yubi Flow is a corporate credit rating-agnostic innovative platform that offers multiple solutions, from vendor financing to dynamic discounting. Its advantages include automated invoice processing, payment gateway integration, and core bank integration. You can select the products that suit your requirement and connect to cash-rich anchors from multiple sectors to solve the issue of working capital management.

How Dynamic Discounting Differs from Other Solutions

  • It is not factoring
  • It is different from traditional discounts
  • It is not the same as supply chain finance

FAQs

The benefits of dynamic discounting are very compelling. However, the implementation is equally difficult if every discount condition for the invoices is manually entered and recorded.

But, with Go-Yubi Discount Management, everything is made easy. Yubi evaluates how much liquidity should be made available, what conditions should be implied, and who should be the suppliers. Not to mention, Yubi offers a plethora of benefits like:

  • Unified integration
  • Experienced team to provide the right solution
  • Highly flexible models
  • Automated solutions
  • Low cost of implementation

Supply chain finance and dynamic discounting are almost the same solutions. However, they differ on two parameters, the financial advantage to the buyer and the source of the funds.

Dynamic discounting cuts down the price of goods sold to a buyer. As a result, it helps them to increase their returns and profit margins.

If invoice discounting is used correctly, it can be a very important tool for handling the cash flow of a business. In addition to it, invoice discounting offers a host of other benefits like:

  • Freeing up the cash to buy supplies, conduct payroll
  • Attempt a growth project
  • Reduces seasonal stress
  • Handles cash flow gaps

You can get in touch with us. You can fix a meeting with our business development manager for further discussion. Once you agree to work with us, we will get in touch with your present invoice finance provider and fix a transfer of your particular invoices to us. You will be able to use your funds within 5 days.

Invoice discounting adds to the cash flow in a business enterprise. Such cash flow boosts additional growth. Due to invoice discounting, it is not mandatory to wait for the customers to pay. It is possible to discount the sales invoices from the lending financial institution to address the cash requirements.

Confidential invoice discounting is termed as a type of invoice financing or an agreement. It is kept confidential between the finance provider and the business in question.

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.

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.