Dynamic Discounting

Summary

Concept of dynamic discounting and how it works

Content

Dynamic Discounting is an arrangement between a buyer and supplier where payment for goods or services is made early in return for a discount. The “dynamic” component refers to the option to provide discounts based on the dates of payment to suppliers as opposed to the conventional ‘static discount’ where the buyer gets a fixed discount if payment is made early – not considering ‘how early’. Generally speaking, under a dynamic discount arrangement, the earlier the payment is made, the greater the discount is.
This has become more relevant in today’s world. Earlier, in the era of paper invoices, it took typically 15-25 days for an invoice to be ready for payment. Now consider a payment term consisting of a discount of 2% if the payment is made within 10 days. By the time the invoice is approved for payment, the option to avail discount is already gone. With the advent of e-invoicing and automated invoice processing, this lead time has gone down to 3-5 days, opening the opportunity to earn extra discount for the buyer and availing early cash flow for the supplier.