What Type Of Businesses Can Benefit From Dynamic Discounting?
Dynamic discounting is a financial arrangement where discounts are given in exchange for an early payment with variable discounts offered depending on how early the payment is made. The earlier a company makes a payment, the larger the discount it will receive. This system provides an incentive for companies to pay for goods and services in a faster time period. Businesses of all sizes can benefit from dynamic discounting – both as the payer and payee. Below are a few examples of how different businesses can benefit from this system.
Small Business Benefits of Dynamic Discounting
Imagine a small business with a shoestring budget. It needs goods and services, yet it also needs cash. Many small business owners put off paying their bills for as long as possible as cash flow is always at the top of mind. Doing so risks business relationships with their suppliers who may also have their own cash flow issues. Not only could relationships suffer, suppliers may opt to halt the delivery of future goods and services as a means of minimizing risk. In this example, both the small business and the supplier could benefit from a dynamic discounting arrangement. By offering a dynamic discount, the supplier could get paid faster while the small business could save money. Given a choice between paying a non-discounted bill and a discounted one with a time-sensitive discount amount, which one do you think a small business owner would pay first?
In addition to faster payments for the supplier and an attractive discount for the small business owner, both parties could benefit from an improved relationship. Since the supplier is paid promptly, it would be more likely to remain responsive.
Big Business Benefits of Dynamic Discounting
Larger businesses experience these same benefits but on a larger scale. By fully leveraging dynamic discounts, enterprise organizations can reduce their annual spending significantly. In addition to receiving discounts simply for paying bills that they’d have to pay anyway, they can also conceivably receive a higher return than the meager interest rates offered by banks.
For example, if a company’s interest bearing checking account yields 1 percent and a supplier offers a 5 percent discount for paying an invoice in 10 days rather than in 30 days, which option has the highest return? Paying the bill early is a much smarter choice from a financial perspective.
Large suppliers also benefit by offering these discounts. For example, credit is much tighter in today’s economic environment. By incentivizing early payments, suppliers can ensure a steady flow of cash and become less reliant on credit.
Dynamic discounting is a win-win strategy with benefits for buyers and sellers alike across a wide range of business types. Whether you run a small business or an enterprise organization, managing its cash flow is a crucial, seemingly never-ending task. As a buyer of goods and services, it often makes sense to seek and leverage dynamic discounts from your suppliers. In fact, your suppliers may be more receptive to this sort of arrangement than it would be to an across the board discount. Whether you’re a buyer or seller, a conversation about dynamic discounting could lead to a win-win arrangement and improved business relationships.