Dynamic discounting is a relatively new option in the market offering a chance for suppliers to offer and they pay early. Have you ever wondered how it works, why a supplier would want to offer a discount for early payment, and how it could improve your total AP? Let’s take a look!
Dynamic Discounting: The Next Innovation
Suppliers have long offered traditional static payment terms, such as a 2% discount for an invoice that’s paid in the first 10 days (2/10 net 30). Dynamic discounting is dynamic in that, the buyer chooses from among multiple discounts based on the timeframe in which they can pay an invoice. The earlier the payment is taken, the higher the discount.
There are three dynamic discounting options: Early Payments, Extended Discount Terms, and Dynamic Payment Terms (aka ASAP terms). None of these change the supplier’s standard payment terms, they just offer additional incentive for early payment on an invoice-by-invoice basis.
Early Payments enable suppliers to create discount schedules for the invoices they submit to buyers, and then allows buyers to choose an early-pay discount on an invoice-by-invoice basis. When buyers have extra cash flow, they can take advantage of these discounts, and when cash flow is tight, they simply pay invoices net 30 or 60, for example
Early Payments begin when buyers choose to pay an invoice early in exchange for a discount. If the supplier accepts the new payment date, they will offer a discount to the buyer. The buyer then decides whether to accept the discount and make the early payment.
Extended Discount Terms
Extended Discount Terms are offered on invoices that already offer a traditional static discount. The buyer can choose to pay one invoice earlier than the traditional discount terms for an extra discount, or can choose to pay after the discount terms for a lesser discount. The supplier chooses whether to accept the revised discount terms.
Dynamic Payment Terms (ASAP Terms)
Dynamic Payment Terms are established between the supplier and buyer at the beginning of the contract. They are maintained like normal payment terms, so the supplier no longer needs to approve discounts on an invoice-by-invoice basis. All invoices are offered the same discount terms.
The Benefits of Dynamic Discounting for the Buyer
The answer here is simple, buyers save money on every invoice they pay early!
It may not seem like a large discount (anywhere from 0.5% to 3%), but when you start accumulating these savings over multiple invoices, multiple suppliers, multiple months…you will find significant savings by the end of the year. There is no risk to buyers since they already have the cash and are simply paying less; it’s a proactive way to generate returns. Buying organizations also strengthen their relationships with their suppliers by providing early payments, making the suppliers’ job a bit easier.
The Benefits of Dynamic Discounting for the Supplier
Why would suppliers want to offer a discount on invoices? It doesn’t seem like that would be a benefit, but it is! They offer a discount to entice buyers to pay early to improve their cash flow and to reduce the time their AR team spend on the phone or sending emails inquiring about late payments.
Dynamic discounting gives suppliers the flexibility to decide which invoices they want paid early, when they want to be paid, and at what discount. If they want to skip a discount on a particular invoice, they can do that, too. It is fully in their control. With dynamic discounting, an automated system prevents buyers from receiving an early pay discount if still paying at a 30- day interval, a scenario that may have been previously overlooked due to slow internal processes.
The Buyer and Supplier Relationship
Buyers and suppliers strengthen their relationship through dynamic discounting. It provides discounts for the buyer, improves cash flow for the supplier, and eliminates the need for the suppliers’ AR team to call the buyers’ AP team to inquire about payments. It’s a win-win!