The Rise of Dynamic Discounting
How Factoring Works?
Suppliers tend to have a significant amount of their cash tied up in accounts receivables. Hence, these suppliers often resort to bank borrowing to meet their working capital needs. Banks have been using the bills receivables that these companies have as security to make short-term loans to them. This process of making loans against future receivables is known as factoring or bills discounting.
Factoring vs. Dynamic Discounting
Corporate companies have come to realize that factoring is a waste of resources. For instance, let us assume that company A buys a product from supplier B. Now supplier B has a bill worth $100 which will be paid after sixty days. They take this bill to the bank and discount it. As a result, they get $98 today itself. Hence, $2 is paid to the bank as interest for a very short-term loan.
Instead, supplier B could have offered the company A to prepay the invoice and give them a 2% discount. The bank does not add any value since in most cases it does not assume the risk of non-payment of the invoice. It is for this reason that the world is now moving towards a new concept called dynamic discounting.
As per this concept, suppliers have the option to request payment from the buyer at any time. This is done by creating a portal whereby the supplier and buyer both have clear visibility of the invoices that have to be paid. The suppliers are then given the option to request an early payment. The discounts that they have to offer on these early payments are mapped to a sliding scale. This means that if an invoice is due in sixty days, the discount percentage will be higher as compared to an invoice that is due in seven days.
The benefit of this model is that both parties have the information required to make informed decisions about their working capital. The supplier can access early payments whereas the buyer can get bigger discounts. Both parties can gain from this arrangement. The only loser in this entire arrangement is the bank.
Factors Supporting Dynamic Discounting
The concept of dynamic discounting has been present in the academic world since the year 2010. However, it is only recently that the idea has started gaining some momentum. The major factors that have influenced the rise of dynamic discounting are as follows:
Effects of Dynamic Discounting On the Banking Industry
Dynamic discounting is being adopted by many companies across the world. The number of suppliers opting for this process is doubling almost every year. The buyers and suppliers are reaping the positive benefits. However, banks all across the world are facing a negative impact.
To sum it up, dynamic discounting is rising rapidly. It is quickly becoming a norm. However, dynamic discounting can only be implemented by firms which have automated processed and technological expertise. Also, banks may need to look at other avenues to deploy their short-term funds since factoring and overdraft may soon become obsolete.

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