Self-funding has been the primary mechanism to date for corporations to fund invoice discounting and dynamic discounting programs (which explains, in part, why Taulia has been growing so quickly, since they started this model). But how do companies self-fund invoice discounting programs? In a recent white paper, “On-Demand, Event Triggered Finance With Network Models – A Game Changer?,” my colleague David Gustin explains how self-funding programs work in practice.
David observes that, “Self-funded programs can either utilize static early payment discount terms (e.g., trying to slowly convert suppliers over to a standard discount such as 2% net 10) or, alternatively, use dynamic discounting to make suppliers dynamic offers to pay the invoice early in return for a discount (with the money comes from the balance sheet of the buyer).”
Further, “Such offers are one-time, or increasingly, on a tailored discount schedule where the supplier has the flexibility to choose when they want payment in exchange for the commensurate discount calculated by that schedule. In either case, the buyers’ DPO metrics will shorten as they extinguish their payables earlier, but the buyer will also earn the discount in return (i.e., a favorable price variance). Broken down, dynamic discounting is essentially an online request for change on a payment term – a form of ad hoc funding.”
Self-funded corporate programs are relatively easy to get off the ground provided a company’s balance sheet can support the efforts. But longer-term, as programs scale and treasury begins to look at the working capital requirements necessary to support global programs at scale, it can become interesting to look at third-party options to fund these efforts.
We’ll explore these in a follow-up post. If you’re curious to learn more today on the topic, download David’s full analysis here. We also encourage you to investigate our deep, subscription coverage of trade financing, invoicing discount and P2P on Spend Matters PRO.
In addition to Spend Matters PRO research, David and Jason offer workshops, lectures and advisory services to corporations, banks, private funds, consultancies and technology providers that want to learn more about the trade financing ecosystem and its intersections with new technology products and platforms. Contact them directly to learn more: jbusch (at) spendmatters (dot) com or dgustin (at) tradefinancingmatters (dot) com.