Dynamic Discounting v/s Traditional Supply Chain Finance – Understanding the difference

June 26, 2019

Traditional Supply Chain Finance offerings of Invoice Discounting or Reverse Factoring have been around in businesses for a while now. The suppliers are paid early in exchange for a fixed pre-determined discount rate by third-party financiers on-boarded by the buyer.

While this provides the means to suppliers to access working capital funds, its rigidity has often derailed long term impact. Sellers can access the line of capital only if the fixed discounting charges were acceptable and given that the tenure of discounting is already fixed, sellers have little flexibility in maximizing their utilization when they need funds.

Dynamic Discounting, on the other hand, gives buyers and sellers the flexibility to choose the timing and the pricing or the discount at the time of the transaction. In dynamic discounting, sellers can select the invoices to encash depending on their liquidity and cash requirements and accept a discount rate they are willing to pay at that point in time. On the other hand, the large corporate buyers can utilize dynamic discounting to employ idle cash to earn better rates of return by making early payments to suppliers.

In today’s fast-paced world where business situations and contexts change in no time, dynamic discounting offers much-needed flexibility to both buyers and sellers with an instrument that can be easily molded to meet both their financial goals in the best possible manner. A quick look at how dynamic discounting is different from traditional supply chain finance programs

1.   Fixed cost of funds

Traditional discounting programs mandated fixed discounting charges that must be borne by the seller to access working capital funds. With Dynamic Discounting, there are no more fixed charges. The buyers offer early payment on invoices in return for variable discounts computed basis multiple parameters such as cash flows, the volume of invoices, and days outstanding.

The sellers are no longer under the obligation to accept the charges proposed. The seller can choose to utilize it only when they find the rate of discount acceptable and are in need of cash. This flexibility to choose has made fixed costs redundant. Rather, leading to a reduction in the cost of capital for both buyers and sellers.

2.   Timing of Funds

Unlike traditional forms of discounting, with dynamic discounting, sellers need not be locked-in to a program and pay discounting charges for a fixed tenure when they do not require funds for that long. Dynamic discounting allows sellers to time their transactions in such a manner that the cost borne for the additional capital is only as much as is required.

3.   Employ excess cash or access Bank’s funds

With the advent of flexible funding platform’s such as Cashinvoice, dynamic discounting is also tweaked to allow flexibility to buyers to employ their funds to provide early payment discounts to their suppliers in case of a cash surplus and rely on financial partners to fund the balance in case of a deficit. Thereby offering the buyers an alternative investment avenue for their idle cash while offering access to early payment to their suppliers in need.

4.   End-to-End Digital Processing

Dynamic discounting removes the requirement for tedious paperwork. Being completely digital in nature from capturing data to disbursement, the discounting process is dynamic and system-driven allowing for accuracy, efficiency and transparency in transactions.

The ever-changing world of business today, demands agile solutions that can change with changing business contexts and working capital finance is no exception. Dynamic Discounting is an efficient means of optimizing working capital finance, empowering access to capital on-demand and at the best price possible.

Reach out to us to know more about how Cashinvoice can digitally leverage your SCF programs to offer maximum returns.