Discover the key differences between supply chain finance and dynamic discounting, two popular forms of early payment programs
Written by Simon Beck, C2FO Senior Director, Australia.
Between supply chain woes, inflation pressures and the lingering effects of COVID, it’s taking businesses longer and longer to get paid. Fortunately, dynamic discounting and supply chain finance can help free up funds faster.
Slow payment can have a real and negative effect on businesses. According to a QuickBooks survey, 65% of mid-sized businesses — those with 25 to 200 employees — report spending 14 hours per week collecting payments and chasing late payments.
And that can have an impact on growth: 89% of the businesses surveyed by QuickBooks said late customer payments had set back their long-term goals. Even when payments are made on time, longer payment terms can be challenging — some businesses don’t have the luxury to wait 60 or 90 days for working capital.
Supply chain finance and dynamic discounting speed up the payment process while delivering sizable benefits to both buyers and suppliers. In this post, we’ll compare the advantages of each approach and how they can affect your cash flow.
What is dynamic discounting?
With dynamic discounting, suppliers offer a discount to buyers that agree to use cash on hand to pay their invoices early. The size of the discount will vary. Generally speaking, though, the earlier the payment, the bigger the discount.
Unlike other dynamic discounting programs, C2FO’s platform uses a marketplace approach to dynamic discounting.
First, a buyer uploads its invoices to the platform, and the buyer sets a target for the size of the discount it is seeking in exchange for making early payment.
Using the platform, the buyer’s suppliers then make offers for how much they’re willing to discount those invoices in order to get paid early. C2FO’s algorithm considers all the offers to determine which ones best meet the buyer’s target and should be paid early.
The big benefit of this approach is that suppliers have more control over the size of their early payment discounts — or if a discount is offered at all.
Dynamic discounting is much more flexible than static discounts. Under static terms like 2/10 net 30, a buyer can claim a fixed 2% discount only in the first 10 days after the invoice is issued. With dynamic discounting, discounts could be made available at Day 11, 15 or even 21.
Plus, under static discounting, buyers — especially large enterprise buyers — tend to have more leverage and can often dictate the discounts they want. Dynamic discounting allows suppliers and buyers to seamlessly agree to a rate that works for both parties.
Buyers like dynamic discounting because the discount reduces their cost of goods sold (COGS). That discount usually represents a larger rate of return than other investment opportunities, and it’s risk-free. And, by paying suppliers early, the buyers are helping to ensure those suppliers are financially healthy and able to fulfill future orders.
The other benefits to dynamic discounting? No outside financing is involved, and thanks to the flexibility and the lack of a middleman, dynamic discounting is expected to be one of the fastest-growing financing solutions in the market.
What is supply chain finance?
Supply chain finance (SCF), also known as supplier finance or reverse factoring, can also help buyers pay their suppliers faster.
Under an SCF program, a buyer will typically finance early payment of its suppliers’ invoices through a bank or other financier. The supplier gives a discount in exchange for early payment, the same way as with static or dynamic discounting. The buyer typically pays the financier back on the invoice’s original due date or later. For buyers trying to hold on to their cash, SCF can be a lifesaver.
Supply chain finance improves liquidity for both parties, allowing suppliers to get quicker access to what they are owed and buyers to have more time to pay their invoices.
Dynamic discounting vs. supply chain finance
There are a couple of important technical differences between dynamic discounting and supply chain finance.
- Dynamic discounting is typically used when the buyer has cash on hand. Supply chain finance is utilized when the buyer wants to offer early payment but needs to conserve cash.
- With supply chain finance, early payment is financed through funds from a bank or some other third party, and that financing is based on the strength of the buyer’s credit, not the supplier’s. Dynamic discounting doesn’t require the buyer to borrow funds.
Supply chain finance has additional drawbacks for suppliers, though C2FO has addressed these obstacles with specific products and solutions.
- Suppliers that are invited into a supply chain finance program usually have to agree to be “all in” — all of their invoices for that particular buyer must be funneled through the program. With C2FO, suppliers and buyers can tap into early payment whenever they choose.
- With many supply chain finance programs, there is no room for negotiating the discount; however, C2FO allows suppliers to set a discount that they find acceptable through patented Name Your Rate®
C2FO offers a supplier-friendly version of both solutions
Dynamic discounting and supply chain finance are two different solutions for the same problem: How can businesses access the working capital they need, quickly and easily? Depending on the situation, each approach can offer significant value to buyers and suppliers.
With C2FO, companies don’t have to choose. Our dynamic discounting and Dynamic Supplier Finance solutions are designed to work hand in hand. C2FO makes it easy for buyers to switch between these solutions as needed so they can continue to pay invoices ahead of schedule, without interruption. If you’re currently selling to Woolworths, Chevron, Newcrest or Costco, you can accelerate your receivables. There are many new customers currently being added to the platform so stay tuned.