In the past few weeks I have been approached by two of our largest enterprise customers, both addressing similar challenges. These two enterprises are implementing dynamic discounting with growing demand from their suppliers. Their challenge is the prioritization of early payments distribution among their suppliers, as the total amount allocated for dynamic discounting is much smaller than the actual demand.
This is a great problem to have, I reckoned. The growing demand for dynamic discounting means that our customers are capturing greater volumes of discounts and more of their suppliers are getting access to low-cost capital. And the solution should be rather simple —so I thought — just add more capital to the dynamic discounting program!
The problem, they say, is that the CFO opposes additional funding of the dynamic discounting program, claiming a reduction in their Days Payable Outstanding (DPO) reflects badly on their financial reports. But what about the millions of dollars captured through the discounts? Isn’t that a good enough compensation? Apparently not.
What if instead of you putting your cash into play we bring in a financing firm that will pay the suppliers early based on your non-recourse commitment to pay? I asked. After they thought about it they came up with the question: what’s in it for us? If we are committed to pay, we actually take the risk out of the equation.
That is true and that is why this model of supplier funding includes a gain share between the enterprise customer and the financing entity. This model is an advanced reverse factoring combined with dynamic discounting that offer gain share between the buyer and the financing firm.
There are several elements that characterize this advanced model:
Automated funding approval process: Funding decisions are automated using the P2P process
validation, compliance rules, and real-time reconciliation.
Extending the financing window: The automated near real-time funding approval process
allows for the funding to take place much closer to the invoice issue date.
Combining reverse factoring with dynamic discounting: Suppliers have access to virtually
unlimited funding sources — it can be either the buyer or the financing firm — utilizing the
same process and roughly the same cost of funds.
Offering flexible funding terms: Suppliers can select for each invoice the percentage of the
total amount to be funded and the date they want the money to be transferred to optimize
their financing costs.
Combining dynamic discounting with reverse factoring enables enterprises to extend the
reach of their Early Pay programs even to the smallest suppliers. The CFO gains flexibility to
control the amount granted to dynamic discounting, with the balance of the demand for early
payments covered by external financial firms. On the supplier side, the early payment is
transparent whether implemented through dynamic discounting or through the reverse
It is a WIN for the buyer, a WIN for their suppliers and a WIN for the financing partner.