Businesses generally prefer receiving spot payments for all of their transactions. Sellers must give purchasers a credit term, though, because of the way the market operates. Due to which, there is a delay between the fulfillment of sales and payments. This significantly affects firms' cash flow, especially for small businesses and start-ups. Companies search for alternatives to this circumstance to get paid early for their sales. One such method is Dynamic Discounting.
Dynamic Discounting seeks to boost buyer profitability by reducing the cost of goods sold (COGS). It gives the flexibility to suppliers to get paid faster in return for offering a discount for the services and goods offered. The dynamics depend on the relation between the date of payment (time) and discount offered in return (money saved). The payment can be even made before the invoice maturity date, often ensuring much more attractive terms to the vendor (than say, asset-based lending). Buyers typically use their own excess liquidity, instead of going to a financial institution, to “fund” the program and capture discounts – which often generate greater returns as compared to traditional money market instruments.
The dynamic discounting model allows for variable cost and timing. When suppliers require cash flow, they can now offer a discount to receive early payment, thereby reducing their days sales outstanding to improve their working capital position. It is generally done on an invoice-by-invoice basis. Dynamic discounting provides for early payment depending on the payment conditions, in contrast to static terms. On request from the suppliers, the early payment window can be made available. Cost is another element of dynamic discounting. The cost may vary on a sliding scale or be more involved depending on the methodology employed. Dynamic discounting is frequently compared to conventional static discounting schemes, in which a buyer essentially gives two payment options: a discounted sum before a set date or full payment at the end of the invoice's term.
To meet their short-term capital needs, businesses have a variety of options. Dynamic discounting, however, is a superior and more economical concept. This is how it varies from other kinds of financing:
- Conventional discounts are highly rigid. On the other hand, the dynamic discount is determined as a time function. The buyer is free to pay at any moment before the credit period expires and will still receive the agreed-upon discount.
- Buyers are allowed to use their surplus cash instead of the banking funds to pre-pay their suppliers at a discount.
AI-driven dynamic discounting basically takes the guesswork out of the discounting model. It enables suppliers to access liquidity by applying AI suggested discounts on approved invoices. Both the terms of payment and the amount of discount applied are suggested by the algorithm, keeping in mind the best middle ground for both the supplier and buyer. The model is extremely advanced and is based on disparate data streams like transaction history, currency exchange rate, crude prices and more. The model has a common purpose of increasing cash flow and making each transaction a success.
Dynamic discounting is one of the methods that can assist suppliers in obtaining consistent cash flow and maintaining the necessary liquidity, while generating higher returns on buyer companies’ surplus cash and retaining good relationships with suppliers.
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