Glossary of Business Credit Terms

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Dynamic Discounting

Definition of Dynamic Discounting

This is a collection of methods used in establishing payment terms between supplier and buyer in a bid to accelerate the payment of goods or a service for a certain discount or at a reduced price.

These methods are used in B2B transactions when there is no pre-established early payment or contractual term in existence. It can also be used when the payment date opposes the agreed terms of discount.

How does Dynamic Discounting Work?

Dynamic discounting is a simplified form of supply chain finance whereby the supplier agrees for the payment of its invoice earlier in a bid to receive a certain discount. The payment time and amount to be paid are freely and quickly negotiable. The discounts increases as the payment are made earlier. Unlike the supply chain finance which is generated by the bank and requires its suppliers to undergo complex underwriting, the dynamic discount increases the saving of cost for the buyers.

What Type of Business Uses Dynamic Discounting? 

Businesses in a wide range of sectors use dynamic discounting. They include:

  • Automotive
  • Manufacturing
  • Electronics
  • Retailing

How to Obtain Dynamic Discounting for My Business?

To qualify for dynamic discounting, the business must present these documents:

  • Full business plans
  • Audited financial statements
  • Details and references of the directors
  • Financial forecasts
  • Credit reports
  • Information on assets and liabilities

The business is also expected to:

  • have been in operation for at least 3 years.
  • have annual revenue of $2 million.
  • have supplier relationship in existence
    be credit insured to qualify.
  • have a product liability insurance.
  • provide accurate financial records.


The Advantages and Disadvantages of Dynamic Discounting

Advantages

The benefits of employing dynamic discounting includes:

  • Ensures buyers get risk-free returns and benefit from double digits.
  • A lien is not needed to be filed by the business in this financing type.
  • No fee needs to be paid by the buyer in extending the payment term and the supplier is required to pay a little discount to receive early payment.
  • It eliminates the use of expensive financial options to acquire a stronger balance sheet or cash liquidity. It does this by offering a flexible approach of discounting receivables to suppliers.
  • It puts the timing of payment and the amount to check, creating the platform for forecasting advanced cash flow.
  • Dynamic discounting is a financial pre-delivery tool. It can build the inventory of a business, ensuring its growth.
  • The existing financing of the business is not interfered with, using this type of financing.
    The clients of the business are not required to do anything on behalf of the business.
  • Dynamic discounting is available to any SMB's whether as a product supplier or manufacturing business that meets the requirements to qualify.

Disadvantages

The disadvantages of dynamic discounting are

  • The dynamic discounting is a set of solutions which is not applicable to everyone. It is useful to a business that can be insured on credit. Businesses that cannot be or are not credit insured do not qualify to this financial plan.
  • It only finances the costs of finished and raw products. Other costs cannot be handled using this type of financing.
  • Their payment term is 30 - 35 days for mid-market.

Types of Dynamic Discounting

One-off discounts:

All the approved invoices, in this case, offered to the suppliers to seek out a discount. Based on the discount terms being given by the buyer, the supplier gets the option to approve a discount on a set of invoices or a specific invoice.

Recurring Discount:

After approval, all the invoice coming from a specific supplier gets paid immediately. The offered discount depends on the rates negotiated previously with the supplier and payment date.

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