Glossary · Invoice finance
Dynamic discounting
Dynamic discounting is when a buyer pays a supplier’s invoice early from its own cash, in exchange for a discount that shrinks the later it pays.
Dynamic discounting is a sliding-scale version of the early-payment discount. Instead of a fixed “2/10 net 30”, the discount depends on how many days early the invoice is paid: pay on day 5 and the discount is larger; pay on day 25 and it is smaller.
Unlike supply chain finance, there is no third-party funder. The buyer uses its own spare cash, earning a return on it through the discount.
For suppliers it is optional, invoice by invoice: take the discount when cash is tight, wait for the full amount when it isn’t. The effective annual cost of the discount is worth calculating before saying yes — small discounts for a few days can add up to a high annual rate.
Example
A buyer’s platform offers a supplier 1.5% to be paid 30 days early on a €10,000 invoice. The supplier gets €9,850 now. That is about 18% a year in cost, which the supplier accepts to avoid an overdraft at a higher rate.