Why should CFOs choose dynamic discounting?

Taulia’s CFO Rene Ho discusses dynamic discounting and explains how it compares to other financing options.

As CFOs, we know that maintaining a healthy cash flow is essential to the success of our businesses.

But short-term debt, slowing business growth and lengthy customer payment terms can all make it difficult for companies to meet their obligations and invest in growth. At the same time, seasonal business models can result in uneven cash flows, meaning that companies may need access to funding at certain times of the year to cover cash flow gaps.

In today’s environment, the challenges are all the more pressing. High inflation has ramped up costs, while supply chain disruptions have made it difficult to source essential products. Meanwhile, small businesses have been struggling to access traditional lending, not least because of the impact of bank failures in 2023, as well as the higher interest rate environment. While central banks have embarked on a rate cutting cycle, the environment remains uncertain, and interest rates are not expected to return to pre-pandemic rates.

On another note, late payments continue to present a challenge for smaller businesses in particular. Our 2023/24 Supplier Survey found that while many businesses are focusing on growth, more than half of respondents are being paid late by their customers on average – making it harder for businesses to fuel growth and pay their own bills.

Given these challenges, it’s clear that businesses have much to gain by accessing working capital financing – and I believe dynamic discounting presents a significant opportunity for CFOs to address cash flow gaps, unlock working capital and increase the predictability of incoming payments.

Dynamic discounting: the low-down

If your customer offers a dynamic discounting program, there are many reasons why it may be worth taking advantage of the opportunity to access early payments.

In a nutshell, dynamic discounting allows you to receive early payment for your invoices in exchange for a discount on those invoices. You can choose which invoices to discount and how soon to accelerate payment. The size of the discount will depend on how early the invoice is paid – the earlier the payment, the greater the discount.

As such, dynamic discounting provides access to a flexible form of funding, often at a lower cost than other available sources of funding. By accessing dynamic discounting, you can reduce your days sales outstanding (DSO) and shorten your cash conversion cycle. You can also gain more certainty over future cash flows by choosing when you want to get paid.

Better still, dynamic discounting is very straightforward to use. Providers like Taulia offer supplier-friendly platforms that make it easy to enroll in a program with just a few clicks – and you can also access full payment and invoice-level detail, without having to wade through cumbersome paperwork.

How does dynamic discounting compare to other financing options?

Dynamic discounting is not the only form of financing available to suppliers. So, how does it compare to some of the other options you might be considering, including other types of receivables finance?

• Business line of credit: Companies often use a business line of credit to draw down funds when they want, with interest payable only on the sum they have actually borrowed. This approach does have its advantages – for example, it’s more flexible than a traditional business loan and can help to bridge cash flow gaps – but businesses may need to provide guarantees and meet strict terms in order to qualify. Dynamic discounting, in comparison, is easy to set up, is not associated with strict conditions, and avoids the need for subsequent repayments.
• Invoice factoring: Another option is to factor your outstanding invoices – in other words, sell them to a third party. Typically, you will receive 70-90% of the value of the invoice straight away, with the remaining balance – minus a fee – passed on once the factor has received payment from your customer.
  
  While this does give you access to working capital, it is an expensive funding and legally intensive option that involves a loss of control over your invoices. There is also a risk that your customers may regard the use of factoring as a sign that your company is in financial difficulty. Compared to factoring, dynamic discounting is typically cheaper to access and allows your business to keep full ownership of its invoices.
• Asset-based lending (ABL): Another option is to use ABL to access a line of credit, with funding secured against assets such as accounts receivable, inventory or commercial property. This tends to be a more affordable source of funding than a line of credit. However, setting up ABL can be complex and time-consuming: it may involve documenting the collateral used to secure the loan, as well as going through a lengthy approval process. Again, dynamic discounting is quicker and easier to access.

In other words, dynamic discounting is easier to access than a line of credit, cheaper than invoice factoring, and simpler to manage than an ABL facility. At the same time, the flexibility inherent in dynamic discounting means that you can choose exactly how early to discount specific invoices – making this a valuable tool for helping you navigate unexpected costs, market stresses, and seasonal variations while investing in your company’s growth

Want to find out more about how Taulia’s Dynamic Discounting works? Take a quick tour of our platform today.