What is dynamic discounting?
Dynamic discounting is an arrangement in which a buyer offers to pay a supplier's approved invoice before its due date in exchange for a discount, which gets smaller the later the payment is made. The buyer earns a return on spare cash, and the supplier is paid sooner without borrowing, from the buyer's own cash.
Also calledearly payment discountssliding-scale discounts
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- Funded by
- Buyer's own cash
- Discount
- Shrinks closer to due date
- Applies to
- Approved invoices
How dynamic discounting works
Once an invoice is approved for payment, the supplier sees it in a portal with offers such as a 2% discount for payment today, falling day by day to zero on the due date. If the supplier accepts, the buyer pays early and records the discount as a reduction in cost or as income. Unlike fixed early-payment terms such as 2/10 net 30, the discount is calculated for the actual number of days paid early, usually from an annual rate set by the buyer. For buyers it is a use for surplus cash that often returns more than deposits; for suppliers it is cheaper than many forms of financing and requires no credit approval. Because the buyer's cash funds it, it reduces the buyer's days payable outstanding, unlike supply chain finance. Coupa offers dynamic discounting through its supplier portal.
Common questions
What is the difference between dynamic discounting and supply chain finance?+
Dynamic discounting uses the buyer's own cash to pay early. In supply chain finance a bank or funder pays the supplier early and the buyer pays the funder on the due date.
How is a dynamic discount calculated?+
Usually from an annual rate set by the buyer, applied to the number of days the invoice is paid early, so the discount falls each day until the due date.
How is a dynamic discount accounted for?+
Typically as a reduction in the cost of the goods or services bought, or as other income, depending on the buyer's policy and materiality.
Software for dynamic discounting
Part of Accountio’s accounting technology coverage · Glossary
