E-invoicing and Dynamic Discounting – Definitions and Background

Bruno Koch’s latest 2014 Billentis e-invoicing report has a short section on trade financing (see our own Trade Financing Matters), including a quick exploration and definition of dynamic discounting. In his analysis, Bruno defines dynamic discounting “as a process that allows buyers and sellers of commercial goods and services to dynamically change the payment terms – such as net 30 – to accelerated payment based on a sliding discount scale. Dynamic payables discounting is ‘dynamic’ in one or more ways. Dynamic discounting is also known as dynamic discount management, early payment discounting, or payables discounting.”

A useful definition, but at Trade Financing Matters and Spend Matters, we’ve tried to expand on it a little. For example, in comparison to static 2% Net 10 discount models, with dynamic discounting, my colleague David Gustin notes that “discounts are offered on all invoices approved, opening up the entire procurement spend, not just ones that are approved and ready within the allotted 10 day (or other) time period.” Furthermore, “discounts are calculated as a function of the time of payment, in other words, it is based on a sliding scale” and “Treasury can set terms based on internal hurdle rates, supplier groupings, and other factors.”

With dynamic discounting, David also observes that organizations typically self-fund such programs as opposed to using third-party capital and the “discount received from suppliers replaces income earned by investing surplus treasury funds.” Perhaps what’s most important in this regard, beyond offering a higher yield compared to treasuries or investment grade commercial paper, is that “it is considered a risk-free return.”

There is a range of trends driving the adoption of these solutions. As David points out (and as Bruno also notes in his report), “e-invoicing solutions have enabled a much higher capture rate of invoices. While some companies have deployed EDI solutions with their partners for some time, the amount of electronic capture is much higher as solutions like Web EDI, PO-based invoices, ERS, invoices originating electronically from a vendor portal or an e-invoicing network.” And software can now “systematize” the process of managing discounts and “without technology, most companies have little idea how much earlier they are paying suppliers.”

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