Dynamic Discounting

Dynamic Discounting: Bridging Profitability and Vendor Relationships

A company’s growth and success are dependent on various factors, one of which is its ability to tide over short-term working capital requirements. This requirement is dependent on timely invoice payments from customers. A recent Atradius survey on B2B Payments showed that Indian businesses on an average face a delay of 65 days to get payments from the day of Invoicing. When these payments get delayed, it makes it hard for the company to stay afloat as it affects their cash flow.  Traditionally, there have been different financial products to facilitate working capital funding like supply chain financing, working capital loans, overdrafts, cc limits, etc. However, these options required hours of elaborate paperwork and hidden charges by banks and other financial institutions.  

Over the last couple of years, dynamic discounting has emerged as a viable option for buyers to bridge the gap between supply of goods or services and payment by the buyer by making payments earlier than the due date at a discount on the invoice amount.

Dynamic Discounting

In simple terms, Dynamic Discounting is the offering of discounts in exchange for early payment on unpaid approved invoices for services or products delivered by a supplier. It is a kind of self-adjusting discount scale agreement between a supplier and the buyer that gives the buyer more flexibility to choose how and when to pay their suppliers in exchange for a lower price or discount for the purchased commodities or services.

Dynamic discounting was first invented and patented in early 2000s by Xign Corporation (later acquired by JP Morgan) to help businesses utilise this facility and establish early payment terms with suppliers. Since then, there has been several softwares targeting dynamic discounting as a feature of procure-to-pay automation products.

Cash discounting (mostly static) has always existed as a method to reduce booked expenses and enhance the bottom-line of buyers. Buying organization offers to pay their suppliers early in exchange for a discount. Faster the acceleration of payment, higher is the discount. Dynamic discounts lead to a higher gains for the buyers as they have the flexibility to initiate early payment offers at any stage of the invoice life cycle or payment term. It helps them manage the surplus funds more effectively as they can make early payments selectively whilst suppliers to choose when they wish to take early payment, with complete transparency on pricing

Across the globe, there are various models being used to implement Dynamic Discounting such as:

  • Fixed Payment Date
  • Fixed Discount Rate
  • Bidding Model, etc.

Fintech companies or companies operating in the financial services space provide dynamic discounting solutions using a software application designed to enable the fulfilment process starting from fixing a discounting rate or payment date till the successful completion of payments to the suppliers. These companies either integrate with the Enterprise Resource Planning (ERP) software of the buyer or provide the solution as a standalone utility operating on the dump (.csv or tab separated files) from ERP software.

Use of dynamic discounting methods have infused liquidity in the supply chain of large buyers with a sizable impact on their bottom-line along while providing a hassle-free alternative to suppliers to raise funds at a lower cost than other market instruments.

What is dynamic in dynamic discounting?

The “dynamicity” of this arrangement refers to the choice both the buyer and the seller has to decide the discounts based on the payment date for the product/service delivered. Unlike static discounts, dynamic discounts are calculated that is dependant on the payment date. So the earlier a payment is made, the higher the discount on offer, and vice versa. The discount depends on the payment date. Generally, the earlier the payment date, the greater the discount rate.

Dynamic Discounting and KredX Early

Though dynamic discounting has been around before 2010, it has only recently moved to the mainstream in Europe and the UK while it is still in its nascent stages in Asia. Zero paperwork, no credit score check and ease of operation have enabled it to become an alternative investment class across the globe. KredX Early is one of the pioneers of dynamic discounting in India having introduced the concept of Dynamic Discounting in the Indian market through our proprietary product.

KredX Early is a zero-risk treasury management solution based on the concept of getting discounts through Early Payments. This provides a risk-free alternative option to treasuries of large corporates to deploy surplus funds since the surplus is invested in invoices of the corporate’s own vendors payable against the corporate.

Our cutting-edge patent pending technology maximises returns for corporates and helps vendors increase their chances of securing early payment without getting into any operational hassle, thus ensuring 100% vendor satisfaction. Since the discounting is driven by vendor needs, this ensures that the finance cost is not passed onto corporates at any stage.

How is KredX Early different from other products in the market?

Treasuries of larger corporates are generally always on the lookout for avenues to invest to surplus that give them lucrative returns at minimal risk. There are a myriad of products available in the market each offering low returns with low-risk or high returns at a higher risk. KredX Early is a unique corporate treasury tool that combines the best of both worlds, i.e., high returns at zero risk. Here we draw a quick comparison of KredX Early with popular AMC products available in the market.

KredX Early Products available in market (AMC)
~16% average yield which is 50%

higher than standard market products

~6-8% annualised returns
Zero risk investment option Risky since it is market dependent
Complete control on earnings No control

Merits and Demerits of Dynamic Discounting

Merits

  • Through dynamic discounting, corporates can reduce their annual spend while improving their profitability by paying their suppliers early in exchange for a discount
  • Suppliers, in turn, benefit from the flexibility of discounting some or all of their receivables, thus improving their cash flow
  • Dynamic discounting offers suppliers the flexibility of discounting a part or all their receivables
  • Allows buyers to earn lucrative zero-risk returns
  • No underwriting is required for the supplier and it is almost zero risk
  • Fully integrated with ERP software, the supplier can benefit from the transparency of received invoices on the buyer-side and can offer early payment discounts online
  • Discount amount is calculated dynamically based on the number of days remaining until the due date

Demerits

Generally, the supervision and management of dynamic discounting can be cumbersome to the larger corporates since they will be required to manage the entire process while also managing the supplier-corporate relationships.

However, KredX Early offers an end-to-end cloud-based treasury solution through which the organisation can monitor and manage every aspect pertaining to our Dynamic Discounting product.

Who can benefit from KredX Early?

KredX Early is a tailored product specifically for large companies across various industries and their suppliers or vendors. We provide a solution for both the buying organisations by reducing their annual spend and improving profitability, and their suppliers by strengthening the financial supply chain and their overall business growth. This is truly a win-win situation for both the parties involved and helps improve the relationship between them.

Dynamic discounting is a powerful tool for both buyers and suppliers but is severely under penetrated in the Indian context. Companies who have the ground level execution capabilities and experience dealing with suppliers of large buyers at the ground level will be able to implement it effectively and can help buyers unlock cash flow tied up in the supply chain. At KredX Early, we work closely with the buying organisation to implement our unique corporate treasury tool and help them on-board their vendors onto the platform such that it benefits both the parties. If this is something you or your organisation would like to explore, you can always reach out to us at  info@kredxearly.com or +91-8892058285 for further information about our product.