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Dynamic discounting

Dynamic discounting in practice

Dynamic discounting is a form of supplier finance - often grouped with supply chain finance, SCF, and reverse factoring.


These are arrangements that help suppliers to get cash early when buyers do not want to pay invoices immediately.


Dynamic discounting is different though


Supply chain finance uses an external financier to bridge the time gap between when the supplier wants the cash (now) and when buyer wants to pay (later).


In dynamic discounting, the buyer uses its own money, pays the invoice early and gets a discount.


Really?


Yes - the buyer first negotiates a payment delay with the supplier (eg: 90 days) and then, for a discount, pays the supplier more quickly.


But why not just pay more quickly from the start?


There can be a buyer benefit.


Typically the buyer team that places orders with suppliers and negotiates prices ("Procurement") is not the team that manages the buyer's cash ("Treasury") and who can price the benefit of early payments.


Splitting the negotiation into two separate conversations can benefit the buyer.


"Dynamic discounting" can be dynamic.


First, procurement teams require suppliers to accept deferred payment terms (eg: 90 days delay).


Second, in many cases, suppliers who want cash early bid for it from the Buyer's treasury team. The higher the bid, the more likely the supplier will get the money and the bigger the return earned by the Buyer.


Using an auction can maximise the buyer's return on its money.


Is there a catch?


We think that dynamic discounting is not helpful for suppliers. There's no guarantee on the cost and availability of early payments. If suppliers have to bid each time, they might win, or they might lose.


This leads to financial stress for suppliers. Suppliers have costs to meet (eg: payroll) and often no choice on financing. Dynamic discounting can offer the worst of all worlds leading to uncertainty, risk and cost for the supplier which ultimately will be included in the price they charge the buyer.


Should dynamic discounting be not-dynamic?


In most platforms, enabling supplier discounts to be dynamic is straightfoward.


But we recommend making supplier financing simple and "static". The benefit generated by squeezing the last bit of margin out of suppliers is typically more than offset by the uncertainty that suppliers can experience.


How might static work efficiently?


What's needed is a way to guarantee liquidity at a sensible price whilst still enabling the buyer to book a return. There are three innovations here:


  1. Funding can be added: Prima's platform enables buyer cash to be combined with external funding within a single program - suppliers don't care much who pays them early.

  2. Booking a return: The return is the difference between the cost of money (deposit rate for buyer cash, funding rate for funder cash) and the discount that suppliers agree. Smart platforms monetise this both ways.

  3. Be scientific: There are now systems that can work out the efficient discount to offer suppliers without the uncertainty of auctions (eg: www.calculum.ai).


Take these three points together, and you can have the best of all worlds.


Buyers get to maximise their earnings on all the supplier finance arranged - using their own cash and via funding provided direct to suppliers, all in one program.


And suppliers get certainty on the cost and availability of early payments. Dynamic discounting that is a bit less dynamic.




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