There are two key drawbacks to dynamic discounting which prevent it from expanding beyond a small niche within the supply chain. This is the reason why dynamic discount providers are aggressively trying to get into the much larger (by spend) third party or bank funded segment of Supply Chain Finance.
1. The interest rates, on an APR basis, are very high. Usually over 10%. The APR rates marketed by dynamic discounting providers are generally in the 12%-15%+ range. That’s competitive only with capital sources such as equity financing, p-cards and in some cases factoring. Those sources don’t suffer from disadvantage #2.
2. It’s not a dependable source of capital. The buying organization offers dynamic discounting based on their sources and uses of cash. It may be offered today but not next month, or the price may change significantly.
Dynamic discounting can fill a role in a company’s overall Supply Chain Finance strategy, but it’s a minor role with smaller, non-strategic suppliers.
Bob Kramer
VP, Working Capital Solutions
PrimeRevenue, Inc.
to your point 1, why do rates have to be that high? They are today, but dont necessarily have to be. Dynamic Discounting requires no bank line. Programs can be done by any corporate, investment grade, non rated, non investment grade, etc. So are they have been for the long tail of indirect spend and those suppliers have paid APRs closer to 20+. But again, rates are set by Treasury, and can be different for different supplier groups.
To point 2, Corporates tend to self-fund using their own surplus cash but options are being developed to use third party non bank funds.
Time will tell if this is a niche product or more widespread.
There are two key drawbacks to dynamic discounting which prevent it from expanding beyond a small niche within the supply chain. This is the reason why dynamic discount providers are aggressively trying to get into the much larger (by spend) third party or bank funded segment of Supply Chain Finance.
1. The interest rates, on an APR basis, are very high. Usually over 10%. The APR rates marketed by dynamic discounting providers are generally in the 12%-15%+ range. That’s competitive only with capital sources such as equity financing, p-cards and in some cases factoring. Those sources don’t suffer from disadvantage #2.
2. It’s not a dependable source of capital. The buying organization offers dynamic discounting based on their sources and uses of cash. It may be offered today but not next month, or the price may change significantly.
Dynamic discounting can fill a role in a company’s overall Supply Chain Finance strategy, but it’s a minor role with smaller, non-strategic suppliers.
Bob Kramer
VP, Working Capital Solutions
PrimeRevenue, Inc.
Bob
Thanks for the thoughts.
to your point 1, why do rates have to be that high? They are today, but dont necessarily have to be. Dynamic Discounting requires no bank line. Programs can be done by any corporate, investment grade, non rated, non investment grade, etc. So are they have been for the long tail of indirect spend and those suppliers have paid APRs closer to 20+. But again, rates are set by Treasury, and can be different for different supplier groups.
To point 2, Corporates tend to self-fund using their own surplus cash but options are being developed to use third party non bank funds.
Time will tell if this is a niche product or more widespread.
David Gustin