A reliable way to get paid early: Dynamic discounting

In today's fast-paced business environment, companies need to find ways to optimize their cash flows while also balancing their competing needs for profitability and liquidity. 

One solution that has gained traction in recent years is dynamic discounting - a financing tool that allows businesses to pay their suppliers early in exchange for a discount on the goods or services provided.

For buyers, You simply make money from paying your suppliers

For Suppliers, You get access to payments early from your buyers.

In this article, we'll explore the benefits of dynamic discounting and how it can help your businesses address their financial goals, profitability, and working capital needs.

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 can 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, 2/10 net 30, wherein the supplier offers the buyer a 2% 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 a 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 incentivized to pay at different times until the 25th day under this model, a flexibility that benefits both the buyer and the supplier.

Why you should offer dynamic discounting as a supplier

Suppliers need to embrace dynamic discounting programs as an effective way to manage their finances and mitigate risks associated with long payment terms. 

Offering early payment discounts to their customers can enable them to access better financing, reduce the cost of goods sold, and improve cash flow management. 

This can help to ensure that they can meet their financial obligations, execute business operations smoothly, and maintain strong relationships with their customers.

Furthermore, dynamic discounting can help suppliers to better manage their inventory levels and reduce the risk of stock-outs. By offering early payment discounts, businesses can encourage their customers to place larger orders, which can help to improve their production planning and inventory management processes. This can also lead to lower costs and higher efficiency, as suppliers can take advantage of economies of scale.

Another important benefit of dynamic discounting is improved supplier-customer relationships. By offering early payment discounts, suppliers can demonstrate their commitment to their customers and build stronger, more collaborative partnerships. This can lead to greater trust, loyalty, and repeat business over time.

Finally, dynamic discounting can help suppliers to reduce their reliance on external financing sources, such as banks and other financial institutions. By offering early payment discounts, businesses can improve their cash flow and reduce their need for costly loans and other forms of debt. This can help to improve their financial stability and reduce their overall risk profile.

Offering dynamic discounting as a supplier is a smart business strategy that can provide a wide range of benefits. From improved cash flow management and inventory control to stronger customer relationships and increased profitability, there are many reasons to embrace this innovative financing approach.

Why you should offer dynamic discounting as a buyer

Dynamic discounting is a financing option that offers a range of benefits to businesses. It is a flexible financing option that can be tailored to your needs as a buyer. This leads to more transparent and cost-effective supply chains.

✓Under dynamic discounting, the buyers effectively invest their excess cash in availing the discounts, often higher than the returns earned on traditional investment instruments.

✓By offering payment incentives to suppliers, businesses can receive early payment discounts, which can help them to manage their cash flow more effectively

✓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,  businesses can demonstrate to their suppliers that they value their partnership and are committed to working together for long-term success. This can help to improve supplier relations and reduce the risk of supply chain disruptions.

✓Bridger provides various financing options in addition to Internal funds of the Buyer , to get this payment benefits

Dynamic Discounting on the Bridger 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 utilize their excess cash or can access a credit line from Bridger to finance the program/discounts. As a result, it generates an improved return on such funds compared to an interest-bearing account.

• Create/Upload Invoice

The seller creates an Invoice for their buyers without altering the normal procedure.

• Set Discount Rate

The supplier can choose early payment discounts on the chosen invoices at any time, this discount is a percentage per time.

E.g. 2% for 7 days early payment.

• Invoice Payment

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

If the buyer tries to pay within the window, they pay the discounted amount and after the window, the payment instruction reverts to the full standard amount

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 Bridger. Under Bridger, 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.

Bridger helps mid-sized B2B businesses onboard integrate and transact with each other.

We provide the infrastructure and business workflow that enables onboarding, sourcing, e-invoicing, payment flow, and bi-directionally financing between trading partners.

With Bridger, Buyers and suppliers can onboard in minutes versus months, Send/recieve messages and trade documents, access B2B payment options, and access structured financing, with reduced risks. Our mission is to connect the world’s B2B Partners.

Conclusion

Dynamic discounting is an effective way for businesses to optimize their cash flows, reduce costs and improve supplier relationships. By adopting a dynamic discounting program, businesses can provide a win-win solution that enables suppliers to access early payment discounts while reducing the cost of goods sold to the buyer. By building strong partnerships with their suppliers, businesses can create a more sustainable and competitive supply chain that helps them to achieve their financial goals, bridge profitability, and working capital needs while mitigating risks.