What is it?
If your company has a cash surplus, you might consider to pay your suppliers early in return for a discount. Dynamic discounting offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to use high-cost financing options like factoring or asset-based lending to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superiorcash flow forecasting capabilities.
When interest rates are very low, dynamic discounting is almost always going to give the buyer a better return on its capital than leaving cash in the bank. It’s perfectly possible to use the concept of dynamic discounts to generate a high-return investment opportunity and at the same time, maintaining the financial flexibility vital to the buying organization. Discounts are beneficial not only for the buying organization but also for the supplier. By offering discounts, suppliers are able to reduce their Days Sales Outstanding (DSO), lower their working capital, and have access to lower cost of finance, compared to short-term loans, credit lines or factoring. Dynamic discounting is really a win-win. There is value to both sides of purchasing relationships.