Key Takeaways:
- Dynamic discounting lets buyers pay invoices early to get discounts, saving money while helping suppliers improve their cash flow.
- How it works: The discount amount varies based on how early the payment is made, giving flexibility to both buyers and suppliers.
- Benefits for businesses: This system strengthens supply chain relationships, improves financial planning, and helps manage cash flow more effectively.
Buyers often take up to 90 days in business transactions to pay their invoices, mainly due to slow paper-based approval processes. This can be tough on suppliers, especially small and medium-sized businesses, who need payments sooner to manage their cash flow and keep their operations running.
At the same time, buyers want to reduce their costs on these invoices.
To address both of these issues, companies use a solution called dynamic discounting.
This article explains what dynamic discounting is and how it can benefit your business:
- What is dynamic discounting - the concept
- How does dynamic discount work for buyers and suppliers
- Benefits of dynamic discounting for your business
- How dynamic discounting differs from factoring
- An example of dynamic discounting in action for a construction company
What is Dynamic Discounting?
Dynamic discounting is a payment option that allows you, as a buyer, to make early payments in exchange for discounts from your suppliers. This system helps you save money and gives your suppliers more control over their cash flow, improving their liquidity.
Imagine you're buying goods and services in bulk. Your supplier might offer you a discount based on how early you pay. The "dynamic" part of dynamic discounting means the discount varies depending on the payment date. The earlier you pay, the bigger the discount you receive.
This system is more flexible than traditional early payment discounts tied to standard payment cycles, such as Net 30, 60, or 90 days. For example, a supplier with a Net 30 payment period might offer a 3% discount if you pay 30 days early or a 1.5% discount if you pay 15 days early. With dynamic discounting, you can pay at any time within these periods and receive a discount proportional to how early you pay.
For instance, if you pay 20 days before the due date, a dynamic discounting system would calculate a discount that's lower than the 30-day rate but higher than the 15-day rate—say, a 2% discount for paying 20 days early.
While it may seem counterintuitive for suppliers to offer more discount opportunities, this system benefits both parties. You get more chances to save money and enjoy better payment flexibility. For suppliers, it reduces their days sales outstanding (DSO), meaning they receive money sooner to cover their costs.
Faster payments and shorter invoice lifecycles help you and your suppliers manage cash flow more effectively, allowing for better planning and budgeting for the future.
How Does Dynamic Discounting Work?
Dynamic discounting offers a streamlined approach that benefits both buyers and suppliers, creating a win-win solution for optimizing cash flow. Here's a closer look at how dynamic discounting works, from invoice submission to payment processing.
How Does Dynamic Discounting Work For Suppliers
While most platforms have standard steps for dynamic discounting, Quickly goes against the grain and does this more efficiently in these four simple steps.
- Select an invoice - All invoices that have been approved will show up in your Quickly account under the “Eligible for Early Pay” tab.
- Request early payment - You can then request early payment on a single invoice or batch them together. Review our fees and the total payment.
- Quick payment - You are paid within 1-4 hours or the next business day.
Benefits of dynamic discounting
Businesses can leverage dynamic discounting to stay agile and adaptive in several ways. Here are some benefits of dynamic discounting:
Adapt to Demand Fluctuations
Using dynamic discounting, accountants can encourage suppliers to adjust production schedules based on changing demand patterns. This ensures the company can quickly respond to shifts in demand, reducing the risk of being unable to serve customers when needed.
Prevent Supply Chain Disruptions
Promptly paying suppliers strengthens relationships, making suppliers more likely to prioritize your orders. This approach helps maintain a reliable supply chain, even in challenging market conditions.
Cut Inventory Holding Costs
By minimizing supplier disruptions, you decrease the need to stockpile inventory to avoid long lead times. This reduction helps you save on storage expenses and prevents losses from items becoming obsolete or misplaced.
Strengthen Supply Chain and Forecasting
By enhancing the reliability of your supply chain and refining your forecasting efforts, you take crucial steps to navigate disruptions effectively and stay ahead of the competition. This paves the way for a resilient and successful business future.
Difference Between Factoring and Dynamic Discounting
Factoring and dynamic discounting are financial services that help suppliers improve cash flow by accessing their accounts receivable earlier than the original payment terms.
Key Differences
The main difference between the two lies in how the supplier accesses the funds. In Quickly’s dynamic discounting, suppliers take discounts directly from their buyer as an incentive for early payment. In contrast, factoring involves suppliers selling their unpaid invoices to third-party providers in exchange for early payment, minus a pre-agreed fee.
Example of Dynamic Discounting for a Construction Company
Let’s look at how dynamic discounting works for a construction company called BuildPro, from a buyer's perspective. We’ll use a new example to explain the process in a step-by-step manner.
Step 1: Connecting to Accounting Software
Quickly begins by connecting to BuildPro's accounting software, syncing all approved bills to the Quickly platform. This gives the appropriate vendors visibility into their invoices as potential early payment opportunities.
Step 2: Onboarding Suppliers
Quickly then invites all of BuildPro's suppliers to join the platform. Suppliers gain visibility into the invoice approval process, can see when they would normally be paid, and have the option to request early payment.
Step 3: Early Payment Request by Suppliers
Suppliers review their invoices on Quickly and can request early payment at a predetermined discount rate, typically 2.9%. BuildPro sets this rate and allows suppliers to access funds earlier than the standard payment terms.
Step 4: BuildPro Reviews Requests
BuildPro reviews the early payment requests submitted by suppliers. BuildPro can choose to approve, decline, request revisions, or apply any holdbacks directly within the Quickly platform.
Step 5: Processing and Recording Payment
Once an early payment request is approved, the payment is processed, and the transaction is accurately recorded in BuildPro's accounting software. The supplier receives the payment at the agreed-upon discount rate.
Step 6: Flexibility in Payment Terms
Suppliers have the option to use dynamic discounting on some invoices but not all. For invoices where early payment terms are not accepted, BuildPro will follow the standard 30-day payment terms.
Benefits
Dynamic discounting offers several advantages for BuildPro. It allows the company to manage cash flow more effectively by taking advantage of discounts when possible. It also helps build strong relationships with suppliers, who benefit from quicker payments. This system enhances BuildPro’s financial management and supports a reliable supply chain, making it easier to navigate the complexities of construction projects.
In summary, dynamic discounting through Quickly helps BuildPro optimize its cash flow, strengthen supplier relationships, and streamline financial operations, all while providing flexibility in payment terms.
In Conclusion
Dynamic discounting is a win-win solution for both trading partners. It helps suppliers get paid faster, improving their cash flow and working capital. For buyers, it provides the chance to earn discounts by paying early, leading to greater savings and better profits.
“It took minutes to set up. Our contractors love the freedom...”
Meshal Alshammari, CEO @ Enviro Painting
