How Does Dynamic Discounting Work?
Dynamic Discounting is not a new concept by any means, but it has yet to reach the status of a main stream business tool. Adoption of this technology based, supplier financing vehicle has caught on in certain industry segments to some degree, most notably in the retail space.
For those of you who may not be familiar with the concept of dynamic discounting, at a high level it is really quite simple. The biggest difference from a traditional supplier/buyer discounting relationship is that in dynamic discounting models it is the buying company, not the supplying company that makes the discount offer. The buyer can select, based on any criteria they choose, to offer an early payment those invoices they choose.
Dynamic Discounting has implemented by suppliers across industries, most notably in the retail space.
The amount of the discount may fluctuate based on cash considerations and will generally decrease the close the invoice gets to its normal due date. Thus the “dynamic” feature of this discount model. From the supplier perspective they can generally choose to accept the discount for early payment, decline or in some models provide a counter offer to the buyer. Regardless of model the supplier has the flexibility to accept or reject some invoice and not others.
How Can Dynamic Discounting Benefit My Company?
Dynamic discounting can be a fantastic business tool that offers tremendous financial results. It can also be a valuable tool for your suppliers who can use the program as a financing vehicle with a lower cost of borrowing than many other alternatives. This delivers the added benefit of helping you to insure a healthy supply chain as your weaker vendors can become more financially stable.
However, there are many different models on the marketplace today for dynamic discounting. Many of these models mandate your suppliers join a “supplier network” to participate in these programs and/or participate in regularly scheduled auctions where available funds for invoice payment are essentially auctioned off to the highest bidder.
At ICG, we take a very different approach to Dynamic Discounting. Our dynamic discounting solution enables your existing supplier base and leverages your existing financial and payables systems to offer this ad hoc program to your critical suppliers and vendorsthrough a vendor portal. The program is designed and implemented around your business model to encourage participation and ease of participation for your vendor community.
Take the Next Steps
One factor remains constant no matter what model you may be looking at for Dynamic Discounting. You have to have an efficient accounts payable process in order to fully leverage the benefits. If the time it takes to get an invoice through the process only leaves a few days before the normal payment date arrives, then there is very little opportunity for discounting.
The good news is, the financial rewards from dynamic discounting can easily pay for an upgrade to your AP system and allow you to fully automate the process. Contact us today for more information about AP Automation and Dynamic Discounting.