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Dynamic Discounting vs Supply Chain Finance: What Is the Difference?
Dynamic discounting pays the supplier early from the buyer's own cash, in exchange for a discount the two companies agree. Supply chain finance pays the supplier early through a bank or funder, and the buyer repays the funder later. The difference is who puts up the money.
Both get a supplier paid before the invoice is due, which is why they are often mentioned together. The mechanics, the costs and the companies they suit are different.
How dynamic discounting works
The supplier offers a discount for early payment, or the buyer proposes one. If both agree, the buyer pays the reduced amount from its own cash before the due date. No third party pays anyone. A $10,000 invoice due in 60 days might be paid as $9,800 ten days after acceptance, if both sides agree to that.
How supply chain finance works
In the common bank-arranged version, often called reverse factoring, the buyer approves an invoice and a bank or funder pays the supplier early at a rate based on the buyer's credit. The buyer then pays the funder at the original due date, or sometimes later on extended terms. The supplier receives cash sooner and the funder earns the difference.
Side by side
| Dynamic discounting | Supply chain finance | |
|---|---|---|
| Who pays the supplier | The buyer, from its own cash | A bank or funder |
| Who bears the cost | The supplier, through the discount it agrees | The supplier, through the funder's rate, and often the buyer through extended terms |
| Credit process | None. The two companies agree the terms | The funder assesses the buyer, and sometimes the supplier |
| Third parties | None in the payment | At least one funder |
| Typical setup | Can start with one supplier and one invoice | A program agreement, often with an ERP integration, and often months to launch |
| Usually suits | Companies with spare cash and existing supplier relationships | Large buyers running a formal program across many suppliers |
When each fits
Dynamic discounting tends to fit when:
- the buyer has cash available and wants to use it on bills it already owes
- the supplier wants to choose, invoice by invoice, whether early payment is worth the discount
- the companies want to start small without a program agreement
Supply chain finance tends to fit when:
- the buyer would rather not use its own cash but wants suppliers paid early
- the buyer wants to run one formal program across a large supplier list
- the buyer's credit is strong enough to get a low funder rate for its suppliers
Many companies use both. If you want more on the bank-arranged side, read what supply chain finance is or the supply chain finance overview. To see how the discount-based version works, start with Discount Flow's dynamic discounting software, or run the numbers on your own invoices with the dynamic discounting calculator.
About the author
Kevin Potter · Discount Flow
Kevin Potter leads Discount Flow. He is a finance and strategy executive based in San Diego, California, and studied at Edinburgh Business School, Heriot-Watt University. Kevin is a Chartered Accountant, has a Masters in Finance and a separate Masters in Risk Management. Trained in big-four accounting and worked up through operational, CFO and CEO roles at mid-size and large corporations across several industries.
Frequently asked questions
Is dynamic discounting a type of supply chain finance?
The two are often grouped together because both get suppliers paid earlier. They work differently. Dynamic discounting is paid from the buyer's own cash in exchange for a discount. Supply chain finance usually adds a bank or funder between the buyer and the supplier.
Which is cheaper for a supplier?
It depends on the discount offered and on the funder's rate. With dynamic discounting the supplier sets the discount on each offer. With supply chain finance the supplier usually pays a rate set by the funder and the buyer's credit. Compare the annualized cost of each offer rather than the headline rate.
Can a company use both?
Yes. A buyer can run a bank-arranged program for its largest suppliers and use dynamic discounting for the rest.
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