Meeting the Array of Working Capital Needs: Supply Chain Finance and Dynamic Discounting

When working as part of a strategic accounts payable strategy, supply chain finance and dynamic discounting can help businesses strengthen their supply chains.

When a buyer company is evaluating a working capital management solution, an important initial question that should be asked is, “does this benefit the entire supply chain?”

While there are a bevy of options with great features, sometimes the answer isn’t just one program. For some buyer companies, standardizing payment terms to hold on to their cash longer is a priority; for others, there is excess cash that could be put to use on early payments in exchange for rebates from their suppliers. Depending on the circumstances, a single company may find itself in a position to need both.

While seemingly diametrically opposed, these two goals can be met through thoughtful implementation of supply chain finance (SCF) and dynamic discounting programs to strengthen the entire supply chain and provide buyers with the needed flexibility to make the most of their working capital.

Supply Chain Finance

Buyers are increasingly seeking to improve their cash conversion cycle by extending payment terms to sellers by using third-party financing. Suppliers need greater predictability in their cash flow but lack access to adequate sources of capital. This conflict has the potential to reduce liquidity and resiliency across supply chains. A successful supply chain finance program balances these conflicting needs of buyers and suppliers.

When successfully delivered, SCF benefits the entire buyer/supplier dynamic and improves certainty for suppliers by providing payments for delivered goods and services earlier than agreed terms with the buyer. SCF enables stable, on-demand, reduced-risk transactions that facilitate better relationships between suppliers and buyers. For buyers, the use of third-party capital allows them to hang on to their cash longer and use the extended days payable outstanding (DPO) to grow their business.

Dynamic Discounting

Dynamic discounting is an early-payment solution in which the buyer pays the supplier before the agreed terms in exchange for an invoice discount. Unlike SCF programs, which use third-party funding sources, dynamic discounting allows buyers to draw from their own balance sheet to pay the supplier. It is a good choice for buyers who have liquidity on hand and prioritize cost savings. The discounts could provide a better yield for the company than other short-term investments.

The discount is dynamic because it decreases as the invoice comes closer to maturity on the original terms. For example, if a seller ships goods to a buyer and the original payment terms are 30 days, an invoice paid at day 10 would have a higher discount percentage (that is, the supplier would get less money) than an invoice paid at 20 days. If paid at the originally agreed-upon 30 days, the buyer would pay the full amount with no discount.

Supply Chain Finance and Dynamic Discounting for Healthier Supply Chains

Managing supply chains has become more strategic. Traditionally, SCF and dynamic discounting have been seen as two separate solutions requiring two different solution providers. That has changed, however, as the needs of businesses evolve and technology platforms – like LSQ FastTrack® – are becoming more sophisticated to meet the new needs.

The answer for many companies is to use SCF and dynamic discounting in concert with each other. A company may be flush with cash this month and then need to stretch payments to meet liquidity needs the next. Changes in interest rates may also play a factor in making an SCF/dynamic discounting decision. The flexibility to switch between using their own cash and third-party financing allows buyers to keep their suppliers paid while making the most of their working capital.

The LSQ Supply Chain Finance/Dynamic Discounting Solution

There is no one-size-fits-all approach to maintaining liquidity and supporting supply chain health and resiliency. Every business is unique with myriad nuances and circumstances influencing cash flow and working capital. LSQ FastTrack is a holistic solution for SCF and dynamic discounting (and accounts receivable financing) in a single, unified platform that can match those circumstances and meet your company where it needs to be. Whether it is an extension of DPO, rebate and discount income, supplier financial health, or the management of diversity and ESG goals, LSQ has an option that can help you on your journey.