What is dynamic discounting?

Dynamic discounting is a financial service offered by suppliers that allows both them and the buyer to benefit from early invoice payments. By offering discounts for early payment, suppliers improve liquid capital while allowing buyers to reduce the costs of goods and enjoy greater profitability.

Say a buyer is interested in purchasing goods and services in bulk to pass on to their consumers. The company supplying those goods and services may offer a discount depending on the quantity and how early the payment is settled.

The 'dynamic' element refers to how the discount amount varies depending on the date of early payment to the supplier. Typically, the earlier a payment is made, the greater the discount.

Dynamic discounting increases a buyer's profitability by cutting the cost of goods sold (COGS) as this reduces their accounts payable. Meanwhile, sellers incentivise additional sales and boost cash flow.

What separates dynamic discounting from static discounting - offering a flat rate - is that the discount on the invoice is automatically adjusted based on how soon the payment is made.

How does dynamic discounting work?

Unlike some financial services, dynamic discounting terms are often simple - with suppliers and buyers alike taking advantage of discounts for early invoice payment. A typical dynamic discounting service follows these steps:

A buyer purchases goods from the supplier.

The supplier uploads the relevant invoices onto a specialist platform that calculates a range of discounting options based on the date of payment and the number of goods.

This information is relayed back to the buyer for approval.

The buyer selects their preferred payment date and discounts.

The supplier receives early payment, while the buyer receives the goods or services at a discounted price.

Dynamic discounting benefits

Dynamic discounting proves a popular financial service as it offers many advantages for both buyers and suppliers - which in turn can lead to long-term, mutually beneficial partnerships. Here, Stenn looks at the advantages of dynamic discounting solutions.

Benefits for buyers

Some of the attractive benefits for buyers include:

Risk-free investment – With dynamic discounting, buyers can effectively make risk-free investments by using liquid capital to pay invoices early and access discounts that increase profits when they come to sell. Seizing the early-procurement discounts typically means greater returns than those offered through investing - and without the risk.
Cost savings – Buying products early and in bulk can increase profitability by reducing the cost per unit - allowing them to fund growth, invest in greater stock and exceed procurement KPIs. Should they choose to, resellers can also pass cost savings on to customers to increase sales and loyalty.
Improving supplier relationships – By committing to early payments, buyers often strengthen relationships with suppliers. These relationships can also help open communication channels and reduce disruptions and delays - as the buyer is seen as a high priority.

Benefits for suppliers

Suppliers also benefit from dynamic discounting, with key advantages including:

Improving cash flow – By allowing suppliers to avoid delayed payment terms and access capital sooner. This also improves the supplier's cash conversion cycle.
Early payment for small discounts – By passing discounts directly to the buyer, suppliers incentivize early payment. This gives them access to liquid capital in a way that is more cost-effective than alternative financial solutions such as traditional loans.
Accurate forecasting – As suppliers offer specific discounting terms to encourage earlier payment, it is easier to forecast future finances compared with those working with delayed payment terms of up to 120 days.
Invoice by invoice basis – Dynamic discounting is offered on a single-invoice basis, with suppliers not required to agree to long-term buyer relationships. Suppliers therefore only have to offer early payment discounts when it is beneficial for them.

Disadvantages of dynamic discounting

While dynamic discounting offers many benefits for both buyer and supplier, miscalculations can complicate the process and create challenges. Here are some of the potential downsides of dynamic discounting:

Disadvantages for buyer

Cash flow troubles – To access discounts, customers must pay invoices sooner. Striving to make these shorter repayment deadlines for discounts can create cash flow problems.
Fluctuating discounts – Because discounts are subject to suppliers' discretion and can change, the discounts available one month are not always guaranteed the next. This can leave buyers with unexpected costs and complex forecasting challenges.

Disadvantages for suppliers

For suppliers, the main downside is profitability. It goes without saying that offering discounts reduces profitability. Businesses must therefore be wary of an imbalance in discounts or miscalculations that can result in losses.

Dynamic discounting example

Say a supplier agrees to distribute products to a buyer with a 30-day grace period for payment. That supplier may incentivise the buyer to pay as early as possible in the grace period by promoting a 'dynamic discount' that offers a greater discount the earlier payment is made.

Many suppliers do this through a '2/10 net 30 trade credit' agreement - in which the buyer receives a 2% discount on the total goods if they pay the invoice within the first 10 days of a 30-day grace period. In a dynamic discounting agreement, this offer may then reduce to a 1% discount for payment within 20 days, for example.

For example, Buyer Ltd. purchases goods from Supplier Co. to the value of £20,000.

Supplier raises an invoice for the full amount with 30-day payment terms. However, Supplier is looking to boost cash flow, so decides to offer a dynamic discounting solution to encourage swift payment.

To incentivise Buyer to pay before the end of the 30-day grace period - or as early as possible - Supplier offers 2/10 net 30 trade credit. If Buyer sends payment within the first ten days of the invoice being issued, it receives a 2% discount on the total invoice amount - totalling a £400 discount on the cost of the goods or services.

Buyer pays the invoice within seven days and accesses the 2% discount offered by Supplier. Once the invoice is paid, the agreement is concluded and there are no long-term repayment obligations.

Frequently Asked Questions (FAQs)

What is static discounting?

Static discounting is a financial service in which suppliers offer a fixed discount for early payment that doesn't change regardless of how early the buyer makes payment.

The solution is similar to dynamic discounting in that it encourages early payment with discounted pricing. However, unlike how dynamic discounts change depending on how early the customers settle fees for goods, static discounts are single early payment offers with no fluctuations.

What is the difference between dynamic discounting and factoring?

Factoring and dynamic discounting are both financial services that allow suppliers to boost cash flow by accessing their accounts receivable at an earlier date than the payment terms raised on the invoice.

However, the two services differ in how the supplier accesses liquid capital. In a dynamic discounting agreement, the supplier offers discounts directly to the buyer as an incentive for early payment, while factoring agreements see suppliers 'sell' their unpaid invoices to third-party providers to access their owed funds early, in exchange for a small, pre-agreed fee.

Both services offer unique benefits. Dynamic discounting sees suppliers access more attractive fees, however, factoring guarantees access to liquid capital, unlike dynamic discounting which simply incentivises.

Avoid delayed payment terms with Stenn

Does your business engage in international trade that ties up your capital in delayed payment terms? Stenn finances invoices for small and medium-sized businesses to boost cash flow.

Work with Stenn to turn unpaid invoices into liquid capital or find out more about alternative financing options available to your small business in our Resources Hub. Get financed now.

About the Authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

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