Laurent Sautré, Head of New Financing Solutions, explains the advantages of Dynamic Discounting, the new digital solution for optimizing cash flow and improving suppliers’ WCR.
Low rates at the central bank and the impact on your company’s excess cash flow
European monetary policy still aims to keep short-term interest rates very low, even below zero, to ensure the stability and sustainability of the Eurozone while aiming to contain inflation. While money remains cheap for borrowers, this does not benefit lenders, especially companies that are structurally “cash rich” (or economically rich thanks to the EMP), which can hardly make their investments bear fruit in this context.
Since financial investments are no longer an option, one of the ways to optimize the rate of return on cash is to turn to the company’s partners, in this case its suppliers, and let them take advantage of these cash surpluses to improve their WCR in return for a fee. Put in other words, it’s a sort of investment in the real economy to benefit the supply chain.
That said, the practice of commercial discounting is certainly not recent and has existed since the dawn of commerce. However, over the last decade, we have seen the emergence of solutions, often of Anglo-Saxon origin, which enable companies to optimize their excess cash flow through the use of digital platforms that put buyers and suppliers in touch with each other and manage the discounting in an industrial manner. This is called dynamic discounting.
“Dynamic” in this respect can have at least two meanings:
- The discount rate is dynamic because it is calculated in real time on the date of the supplier’s agreement to accelerate the payment of his invoice before the due date,
- The digital platform puts the buyer and supplier in contact with each other and they agree on the right level of discount, the discount percentage is not static but dynamic.
How Dynamic Discounting works
The idea behind Dynamic Discounting is relatively simple. It allows a company to offer all of its suppliers accelerated payment of approved invoices in exchange for a discount, through a digital platform where the buyer uploads his approved invoices.
Once uploaded, the platform will automatically send a discount proposal to all selected suppliers who have invoices pending payment. The discount rate may vary from one supplier to another or from one industry to another.
Therefore, it is not one supplier or one invoice that will be processed but potentially hundreds of suppliers associated with this platform and thousands of approved invoices uploaded on a daily or weekly basis.
What makes it an interesting solution for Finance Departments ?
It can meet various economic and financial challenges and objectives of the company:
- Remunerating cash surpluses by optimizing the internal rate of return on the company’s cash, which will generate financial income or increase EBITDA.
- Associate all suppliers in a common approach, in a quick and systematic way, whatever the type of purchase (goods, services, overheads) and the category of purchases. Unlike other supply chain finance (SCF) solutions, it offers financing to all suppliers (long tail), regardless of their importance and the value they represent for the company.
- Therefore, this type of solution can also be coupled with (in place) reverse factoring solutions, which are less general or more restrictive in terms of supplier selection.
- Propose a working capital improvement solution to suppliers.
- Implement and deploy a solution relatively quickly.
- Structure the discount offer according to the suppliers’ sectors of activity or their importance.
- Secure the supply chain by contributing to the sustainability of the industrial fabric.
This solution can be deployed either as a stand-alone solution or as a complementary module of a “source to pay” suite offered by e-procurement solution publishers.
Are there any sectors of activity that are better suited to the implementation of this type of solution?
All business sectors use or can use this type of solution. It will depend a lot on the company’s payment policy, the payment terms in place and the discount levels.
What are the advantages for the supplier who is offered this type of proposal ?
The supplier finds an immediate financing solution without constraints, with an almost instantaneous on-boarding and without modification of his collection and lettering process. The UX is generally very user-friendly and adapted to all types of companies. Some Dynamic Discounting solutions even allow the supplier to accelerate the payment of an invoice via a link in an SMS!
It is also a choice whether or not to use invoice payment acceleration, depending on the value of the proposal and the cash flow situation. It can be an opportunistic act or managed over time with regard to the volume of business the supplier has with his customer. This solution allows him to anticipate his cash flow needs (salaries, tax deadlines…) and potentially to remedy them by accelerating the payment of his invoices.
Furthermore -and this remains a significant advantage-, dynamic discounting neither impacts its financing capacities nor require the implementation of CT credit lines, and it does not depend on any bank agreement.
In terms of organization, it also allows you to be paid without a reminder, which avoids administrative and financial costs related to collection.
Dynamic Discounting, a true Supply Chain Finance (SCF) solution ?
It is a full-fledged SCF solution that allows the supplier to access a financing solution, but not only!
Most platforms offer an “early payment” financing solution so that both the buyer and the supplier can benefit from it if they are not “cash rich”.
The financing solutions are diverse and varied, ranging from bank credit lines to debt funds that finance accelerated payments on behalf of companies.
Another innovative aspect is the combination of a Dynamic Discounting platform and virtual card financing (VCN) or purchasing card financing, offering a real improvement in working capital for companies wishing to accelerate invoice payments.
What are the keys to success for a Dynamic Discounting solution ?
I see essentially 3 aspects that allow this strategy to be successful.
First, a good definition of the need and a thorough study of the payment conditions with the suppliers to estimate an ambitious but realistic ROI.
Second, a preliminary beta-version (without necessarily an interface with the ERP) with a PSL (Preferred Supplier List).
Lastly, an excellent communication policy with suppliers in coordination with the Purchasing Department, to explain the strategy being deployed.
For more informations, the replay of the Financium is available here.
Head of New Business Development – EPSA Finance