Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How Dynamic Discounting Benefits Both Buyer and Supplier
Transcript
- Lucas: So dynamic discounting. It's one of those terms that gets thrown around in treasury circles, but for a lot of small business owners, it's just 'that thing where you get a discount for paying early.' And that's not wrong, but it misses the really interesting part. Luna: Which is? Lucas: Which is that it's not a fixed discount. It's a sliding scale. Instead of 'pay in 10 days and get 2 percent off, or pay in 30 for full price,' dynamic discounting says: pay in 10 days, you get a discount based on how many days early you pay. Every day you pay sooner, the discount changes. Luna: So the buyer can choose exactly when to pay, and the discount adjusts accordingly. That's pretty different from the old 2/10 net 30. Lucas: Exactly. And it's a win-win in theory. The buyer gets a return on their cash by paying early—like a guaranteed investment return. The supplier gets cash faster, which can be huge for their working capital. But the devil's in the details. Luna: Let's get into a real example. You mentioned a manufacturer pilot last year? Lucas: Yeah. A mid-sized industrial parts manufacturer—about 80 suppliers, mostly small businesses—rolled out a dynamic discounting program in early 2025. They used a third-party platform that integrated with their ERP. The structure was simple: a daily discount rate of 0.03 percent for payments made within 10 days, and 0.01 percent for payments between 11 and 20 days. After 20 days, no discount. Luna: So if they paid on day 10, the discount was 0.03 percent times 20 days early? That's 0.6 percent total? Lucas: Exactly. Not huge, but for a supplier with thin margins, that 0.6 percent on a $50,000 invoice is $300. And if they get that consistently across multiple invoices, it adds up. The manufacturer offered this to 12 suppliers in the pilot. Over six months, those suppliers got paid an average of 18 days faster, and the manufacturer captured about 0.5 percent savings on procurement costs. Luna: That's real money. But I imagine some suppliers might be wary—like, 'Is this a trick to get us to accept lower prices?' Lucas: Sure, there's skepticism. But the key is transparency. The platform shows the supplier: if you get paid on day 15, here's the exact discount. You can accept or decline. You're not locked in. And for suppliers who are cash-constrained, that optionality is valuable. One supplier in the pilot told me they used the early payments to avoid a high-interest line of credit. Luna: So the supplier is essentially selling a tiny discount for liquidity. And the buyer is effectively earning a return on idle cash. What's the typical return for the buyer? Lucas: It depends on the discount rate and how early they pay. In this case, the manufacturer's effective annualized return on the cash they used for early payments was around 8 to 12 percent. That's way better than what they'd get in a money market fund. And it's risk-free, essentially—they're just paying their own suppliers earlier. Luna: Risk-free return of 8 to 12 percent. That's hard to beat. But what about the operational burden? Don't you need a fancy system to manage all these variable discounts? Lucas: Historically, yes. That's why dynamic discounting was mostly used by large corporations with dedicated treasury teams. But there are now cloud-based platforms that integrate with QuickBooks, Xero, and other small business accounting software. The manufacturer I mentioned used a platform called Taulia—actually, they were one of the early adopters of a new small business module. Setup took about two weeks. Luna: So a small business on the buyer side can offer dynamic discounting to their suppliers without a huge IT project. That's good. But what about a small business on the supplier side? Can they benefit even if their customers aren't offering it? Lucas: That's the catch. Dynamic discounting is typically buyer-initiated. The buyer has the cash and the leverage to set the terms. But suppliers can nudge their customers by offering their own early payment discounts—though that's more like static discounting. Some platforms now allow suppliers to request early payment in exchange for a discount, essentially reverse dynamic discounting. But it's less common. Luna: So if you're a small supplier, your best bet is to ask your larger customers if they have a dynamic discounting program. Or suggest it. Lucas: Exactly. And frame it as a win-win. 'If you pay me in 10 days, I'll give you a 0.5 percent discount. That's a 9 percent annualized return for you.' It's a compelling pitch if the buyer has cash sitting around. Luna: Let's talk about the potential downsides. For the buyer, there's the risk of over-discounting—giving away too much margin if the discount rate is too high. Lucas: Right. You have to model your own cost of capital. If your cost of capital is 6 percent, offering a discount that yields a 12 percent return is great. But if you're cash-poor yourself, paying early might hurt your own liquidity. Also, some suppliers might come to expect early payment and build it into their pricing, so you're effectively paying more over time. Luna: So it's not a magic bullet. You need to run the numbers for your specific situation. But for a business with healthy cash reserves, it can be a smart way to deploy excess cash. Lucas: Absolutely. And the transparency piece is crucial. When both parties see the exact discount calculation, it builds trust. In the pilot I mentioned, supplier satisfaction scores actually went up—not just because they got paid faster, but because they felt the process was fair. Luna: That trust is hard to quantify but really valuable. So if someone wants to explore dynamic discounting for their own business, what's the first step? Lucas: First, audit your current payment terms. Look at your average days payable outstanding. Then talk to your top suppliers—maybe the ones you have a good relationship with—and propose a small pilot. Use a platform that offers a free trial. The manufacturer I mentioned started with just five suppliers for three months. Once they saw the results, they expanded. Luna: Start small, prove the concept, then scale. That's good advice for any cash flow innovation. Lucas: Yeah. And if you're a supplier, you can approach your customers with a similar proposal. Offer a small discount for early payment on a trial basis. It doesn't have to be dynamic at first—just a simple early payment discount. Once they see the benefit, they might be open to a more flexible structure. Luna: And you know, this kind of conversation—where we dig into the mechanics of a specific tool that can actually improve a small business's cash position—is exactly why we keep these episodes ad-free. If these conversations have moved your work forward in some small way, you can support that choice at buy me a coffee dot com slash fexingo. No pressure, just an option if it's useful. Lucas: Yeah, we're not selling anything here. We just want to make sure this kind of practical finance knowledge stays accessible. And listener support helps keep it that way. Luna: Alright, back to the numbers. One thing I want to clarify: the discount rates we mentioned—0.03 percent per day—how does that compare to traditional factoring or invoice financing? Lucas: It's significantly cheaper. Factoring typically costs 1 to 3 percent per month. So on a 30-day invoice, that's 1 to 3 percent total. With dynamic discounting, the supplier might give up 0.5 to 1 percent for getting paid in 10 days. So they keep more of their margin. And the buyer earns a return instead of paying a bank. Luna: So it's a more efficient market. The buyer and supplier transact directly instead of involving a third-party financier. Lucas: Exactly. And technology is making that direct transaction possible even for small players. I think we'll see more small businesses adopt this in the next few years, especially as platforms become cheaper and easier to use. Luna: Okay, so to wrap up: dynamic discounting is a flexible, transparent way for buyers and suppliers to share the benefits of early payment. It's not for everyone, but if you have cash and trust your suppliers, it's worth exploring. Lucas: And start with a pilot. Talk to your suppliers. The worst that can happen is they say no, and you're back to your normal terms. But if they say yes, you might unlock a new source of working capital efficiency.