Dynamic Discounting: A Key Enabler for Supply Chain Finance

Manasi Kalchuri, Principal Product Manager, Oracle Financial Services

Tushar Chitra, Vice President, Product Strategy and Marketing

Vishal Chaturvedi, Product Strategy and Marketing Manager, Oracle Financial Services

The stringent lockdown measures adopted by most countries during the COVID pandemic significantly disrupted global supply chains. As global businesses recover from the after-effects of the pandemic and face the brunt of the Ukraine war and the ensuing inflation, supply chain financing has been gaining prominence over the traditional business lines of credit. According to the World Supply Chain Finance Report 2022, supply chain finance fund volumes rose by 38% in the year following the pandemic.

However, in the existing SCF ecosystem, buyers are less inclined to part with cash while suppliers are struggling to maintain liquidity. To keep the supply chains solvent, governments, regulators, as well as market forces have introduced innovative approaches to maintain working capital without having to arrange for collateral or resort to high interest credit.

Some of these practices include accounts payable solutions such as reverse factoring and dynamic discounting), inventory financing, and accounts receivable. Dynamic discounting, one of the practices becoming more and more prevalent, enables buyers and suppliers to lower their cost of working capital and improve liquidity. It does not involve any financing but is a mutual agreement for discount in exchange for early payment between the parties in trade.

What is dynamic discounting

Dynamic discounting is an arrangement for early payment in exchange for a discount on the invoice amount. In dynamic discounting, the supplier can provide a discount on the invoice if the buyer pays early. The buyer may choose to accept the discount and effect an early payment. The buyer can also propose to make an early payment in exchange for a discount. It is basically a negotiation between the traders to get better credit terms. The discount provided can be fixed or varying. In fixed discount, the buyer can pay anytime within the agreed time frame and enjoy a fixed discount. In varying discount, the percentage of discount reduces as the time passes. The earlier the payment done, the higher is the discount. Dynamic discounting typically applied on an invoice-by-invoice basis, with the discount generally expressed as a percentage of the payable value of the invoice.

While traditional ways of discounting were static, dynamic discounting offers a far more flexible alternative allowing suppliers to get paid at any time based on the agreed payment terms. An example of traditional discounting in practical business terms is called “2/10 net 30”, wherein the supplier offers the buyer a 2% discount if the payment is settled within ten days of raising the invoice. Otherwise, the buyer can pay the full amount in 30 days. No discount is offered if the buyer pays after 12 or 15 days of raising the invoice.

An Illustration of Dynamic Discounting

A supplier manufacturer offers 10%/15 net 45, 5%/30 net 45, or net 45 dynamic discounting terms on an invoice. This means that the discount is higher on early payment and reduces as time lapses. After accepting the offer, if the buyer pays on day 20, it receives 1.66% pro-rated discount calculated dynamically.

Dynamic discounting is a win-win solution for both trading partners. Not only does it strengthen each party’s financial health, but it also improves relationships throughout the supply chain. For suppliers, it improves cash flows, working capital liquidity, and sales outstanding by enabling earlier payments for invoices. It enables buyers to benefit from early payment discounts at any time up to the invoice due date, maximizing savings and leading to improved operating profit.

How dynamic discounting benefits SCF

With the increase in adoption of dynamic discounting in recent times, the Global Supply Chain Finance Forum recognized it as one of the key supply chain finance techniques in their “2021-GSCFF-Enhancement-of-the-Standard-Definition” report. It was introduced in a new category of ‘Advanced Payable” wherein the buyer may utilize its own funds to pay an invoice or payable prior to the original due date. This means that dynamic discounting is widely accepted and is used as an important tool in trade. Banks are also increasingly looking for supply chain finance solutions with dynamic discounting capabilities due to rising demand from corporates.

How Oracle enables dynamic discounting

The Oracle Banking Supply Chain Finance Solution provides comprehensive dynamic discounting capability with support for features such as:

Seamless onboarding of trade partners. Customers can onboard their trade counterparts who may or may not be the customers of the bank. The onboarded corporates can have access to the portal and can execute required transactions.
Discount offer creation by a supplier or a buyer. This allows both buyer and supplier to place an offer for discount on early payment.
Dynamic discount simulation. The simulation widget in the application provides an intuitive user experience that enables parties to simulate the varied applicable discounts as on different selected dates. This capability facilitates decision making for availing discounts.
Acceptance of the offer. Based on the discount values available through simulation, the respective corporate can choose to either accept an offer or reject an offer and provide a counteroffer.
Intuitive dashboards with analytics for easy decision-making. The dynamic discounting dashboard provides a bird’s eye view on receivables or payables with discount offers and the status of such offers, i.e., if the offer is accepted, rejected, or expiring soon. Based on this information, the corporate can quickly act on the same. The application also enables the corporate to access the simulation widget from the dashboard itself further aiding the decision making.
Alerts and notifications. Provide timely alerts and notifications on acceptance of dynamic discounting arrangement.

Explore more about how Oracle Banking Supply Chain Finance enables dynamic discounting.