Complete Guide on Dynamic Discounting: Meaning, Process, Pros & Cons

Dynamic discounting usually applies to individual invoices where the discount is expressed as a percentage of the face value of that particular invoice. Our Dynamic discounting guide will give you complete details about the concept and its usefulness for you to evaluate it for your business.

Meaning of dynamic discounting

Businesses can reduce their costs by taking advantage of dynamic discounting, which involves vendors offering a variable early payment discount to their buyers. The earlier the buyer pays, the higher the discount. The suppliers offer the buyers a choice of invoice payment dates and the calculated discount amount for those dates.

Parties in dynamic discounting and eligibility

Dynamic discounting essentially contains two main parties, the vendor (supplier) and the buyer (enterprise). Buyers with sufficient cash usually opt for dynamic discounting to improve the financial health of their supply chain. The company’s suppliers prefer to participate in the dynamic discounting program since it involves low risk. But the traditional discounting model is the one to go for when buyers do not have adequate cash.

Dynamic discounting may not be an ideal option where the buyer prefers longer payment terms and maintains more cash for other investments. Dynamic discounting is considered the apt choice when both the suppliers and buyers wish to close the transaction without involving any third party financing.

Pros and cons of dynamic discounting

Pros

•  Choosing to pay early can save buyers money since they can earn great discounts for early payment. If not, it allows them to retain cash for other needs.
• Early payment discounts can entitle buyers to cost savings or allow them to retain cash for other uses.
• Vendors can select specific invoices to offer early payment discount terms when they need cash, rather than offering discounts on all invoices issued to buyers.
• Dynamic discounting helps in forward planning, budgeting, and cash flow forecasting.
• Better cash flows and working capital liquidity are a result of receiving early invoice payments.

Cons

• Offering buyers a high discount means having to let go of the full amount due and receive the remainder of it. This affects profitability.
• Buyers are likely to have cash flow problems as they try to scramble enough funds to avail the early payment discount.
• Any vendor that is flush with cash will not have the need to offer dynamic discounting. Thus, the offer of early payment discounts may apply to certain invoices, not all.

Dynamic discounting process

The dynamic discounting process entails the following steps:

Step 1: Goods and services are purchased by the buyer from the supplier.

Step 2: Once the sale is made, the invoice is uploaded to the dynamic discounting platform
by the supplier.

Step 3: Once the buyer verifies the details of the invoice uploaded and finds it acceptable, the buyer approves the invoice for payment.

Step 4: The supplier views the payment dates and range of discount options available and selects the invoices they wish to offer discounted payment on.

Step 5: If an early payment option is selected, the buyer makes the payment accordingly, and the supplier receives that amount on the respective date. If not, the supplier receives the payment on the invoice due date.

Example of Dynamic Discounting

Clear Invoice Discounting & early payment platform is a win-win solution for the entire partner ecosystem by increasing the EBITDA.

Multiple vendors request early payment while buyers accept and approve with Treasury Objective. On the other hand, the financier notices that exposure is shifted from a high-risk vendor to a low-risk corporate.

For instance, Buyer M/s PQR Ltd activates invoice discounting and invites many of their vendors to the program. Let’s consider one of its vendors, M/s ABC Ltd, raises an early payment request on the platform or securely through WhatsApp against a cash discount on the platform.

Next, a buyer, M/s PQR Ltd, accepts the request and decides to either finance (by using internal accruals to maximise EBITDA) or extend the tenure on the same platform. ABC Ltd can view a summary of approved invoices directly on WhatsApp without any additional setup.

Hence, Clear Invoice Discounting acts as a smart platform to generate dynamic discounting demand for all tenures as soon as the vendor is onboarded.

Difference between dynamic and static discounting

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Dynamic Discounting	Static Discounting
A plan that offers a variable early payment discount to its buyers.	Here, the plan is focused on a fixed early payment discount.
The options offered with different discounts and different payment dates allow for more flexibility.	Relatively less flexible.
The freedom of choice provided by the vendor allows them more control over the terms on offer.	With this plan, the lack of flexibility points to more of a “take it or leave it” situation.

FAQs on Dynamic Discounting

Who uses dynamic discounting?

Vendors are the foremost beneficiaries of dynamic discounting since they are likely to receive payments from the buyers earlier than usual since the buyers will look to maximise the discount on offer. This allows improved working capital optimisation.

How does dynamic discounting differ from other solutions?

The opportunity cost for vendors normally associated with low cost raw materials is reduced with the help of dynamic discounting. This is because vendors receive early payments for their invoices, enabling them to put those funds to better use. The suppliers are able to meet their working capital requirements with ease.

 How does dynamic discounting improve margins?

In reducing the cost of goods sold for the buyer, dynamic discounting helps the buyers in achieving higher and better profit margins.