Supplier Finance 101: Dynamic Discounting vs. Supply Chain Finance

June 26, 2014

supplier finance 101 dynamic discounting vs supply chain finance

It’s what many enterprises strive for: earn greater returns on cash investments and boost the bottom line… or is it to improve working capital and lower the cost of funding?

When the economy is tight or credit availability for small and medium enterprises is constrained, supplier discount management programs like dynamic discounting and supply chain finance provide an opportunity to show that AP, Treasury and Procurement can improve returns, working capital or potentially both.

According to Ardent Partners’ 2014 report, ePayables 2014: The Quest, when an enterprise starts to look into accounts payable tools, they need to examine both dynamic discounting and supply chain finance as each has its own and unique way to fund early payment discounts.

So then, what are the key differences?

Dynamic Discounting vs. Supply Chain Finance

Dynamic discounting is a technology-enabled solution for enterprises to capture and automate discounts to their entire supply chain.  Essentially, dynamic discounting works by:

  • Implementing technology platforms to put in place processes for buyers and suppliers that dynamically alter standard terms of payment

  • Buyers see a better return on their cash and suppliers have access to a quick and affordable source of funding

  • Buyers group suppliers into segments based on their size, location and creditworthiness, and offer competitive discounts which suppliers can then choose to accept for early payment

  • Mature platforms empower organizations to change offers in real-time in order to incorporate their cash position and remain a competitive financier

According to the whitepaper enterprises are increasingly interested in dynamic discounting solutions (30%).  Many of today’s solutions provide enterprises with increased visibility and improved operational efficiencies like electronic invoice processing so that buyers can build a foundation for a successful dynamic discounting program.

Supply Chain Finance (SCF) involves a third-party financier--typically a bank—to fund the early payment to suppliers by leveraging the buyer’s creditworthiness.

There are many reasons that enterprises may turn to SCF, although it’s often offered in conjunction with a terms extension.

In the whitepaper, we found that the key benefits to buyers and suppliers include:

Buyer Benefits

  • Improved cash flow as a result of extended Days Payable Outstanding when paired with Terms Extension

  • Reduced cost of good sold through lower financing costs

  • Reduced risks with a more financially stable supply chain

  • Streamlined and automated payments, reconciliation and forecasting

Supplier Benefits

  • Accelerated receipt of payments and improved forecasting ability

  • Better financing rates and terms

  • Automated payment process

  • Reduction of client credit risk

Enterprises must take into account the key challenges of SCF, including:

  • Poor or costly supplier on-boarding; “know your customer” regulations

  • When paired with a terms extension, suppliers deemed ineligible to join and may only see the downside

These programs often suffer from having only the top suppliers invited, and enablement is a cumbersome process that doesn’t make the long tail worth pursuing.

And while banks have traditionally been the primary funders of SCF programs a select group of technology providers have partnered directly with third-party funders, pairing the best of enablement on the long tail with diverse funding sources. This allows SCF to be available to your entire supply chain--even the guy who delivers your Christmas tree.

Both techniques are able to capture early payment discounts and provide benefits to the buyer and supplier. However, when deploying a supplier discount management program, enterprises need to carefully evaluate their goals and leverage technology to automate and optimize the invoicing and payables process, turning every invoice into an opportunity.

The ePayables whitepaper is available for free.  Download your copy here.
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