Is Dynamic Discounting Worth a Second Look?
By Eleanor Hill, Editor
Whenever a vendor labels a solution as a ‘win-win’, treasurers naturally become suspicious. The hackles go up and the brain shuts down. In some cases, though, this well-worn phrase is entirely applicable. Eleanor Hill, Editor, TMI, investigates whether dynamic discounting deserves this label and finds out what the solution really has to offer treasurers in 2018.
One of the busiest sessions I attended at EuroFinance in Barcelona last year was the ‘Treasury Lab’ panel on dynamic discounting. It was also one of the more amusing slots, with direct competitors in the space taking the opportunity to have a polite, yet not terribly well-veiled, war of words.
Interestingly, the number of corporate treasurers looking to learn more about this up-and-coming solution was dwarfed by the swathes of anxious bankers in the room. One of the main concerns some (not all) banks have is that dynamic discounting programmes will take away from the popularity – and commercial success – of the supply chain finance (SCF) programmes that they offer. But this is just one of the handful of misconceptions that exist around dynamic discounting.
It doesn’t have to be a replacement for traditional SCF; it will happily sit alongside an existing bank-led programme (and some banks and fintechs are already collaborating to this effect). In fact, dynamic discounting can be a good way to reach the long tail of suppliers who either haven’t been considered for traditional SCF or haven’t wanted to participate in SCF programmes involving third-party funders.
Part of the beauty of dynamic discounting is its flexibility, and scalability, for that matter. While functionalities and methodologies differ between providers – including C2FO, Taulia, Prime Revenue and Demica – the basic premise is the same. Dynamic discounting brings suppliers and their customers together to find a mutually beneficial way of conducting business.
Again, this might sound like a terrible cliché, but depending on the dynamic discounting platform used, the terms really can be extremely flexible. In some interfaces, buyers and suppliers can even make offers to each other around the date of the early payment and the rate of discount (as a rule of thumb, the faster the payment, the steeper the discount tends to be). Suppliers can also choose how frequently they want to use dynamic discounting, since there is no obligation to do so.
What is dynamic discounting?
In simple terms, dynamic discounting involves a corporate buyer making an early payment to their supplier using their own excess cash. In return for this early payment, the supplier provides their goods and services at a discounted price.
Dynamic discounting allows buyers to improve their bottom line and strengthen their supply chain. For suppliers, the main benefit is convenient access to working capital at favourable rates, negating the need to use expensive factoring solutions or bank lines of credit.
The result is that the buyer can increase their gross margin and EBITDA, whilst generating a decent, low-risk return on excess cash – 6-7% is not unrealistic. Against a backdrop of MMF regulation and continued low interest rates, this is not to be scoffed at. Furthermore, there are the added benefits of shoring up the company’s supply chain, by providing suppliers with much needed working capital, and stronger supplier relationships.
Meanwhile, suppliers stand to significantly improve their cash flow, as well as visibility metrics. With cash coming in earlier, they can also look to grow their business without increasing their debt levels. And since debt stands to become more expensive in the years ahead, this sounds like a smart option.