Dynamic discounting lets a buyer settle an approved supplier invoice before its due date in return for a discount. Unlike a fixed early-payment term such as "2/10 net 30", the discount is dynamic: it is calculated for the exact number of days the invoice is paid early, so the supplier can choose any date that suits their cash flow.
How Dynamic Discounting Works
- The buyer approves supplier invoices in its accounting system as usual.
- Approved invoices appear in the supplier's portal with the discount for paying early.
- The supplier chooses which invoices to accelerate and sees the exact net amount.
- The buyer pays early from its own cash in the next payment run and earns the discount.
- The payment date and discount are recorded back in the buyer's ledger.
A Simple Example
A supplier has a £100,000 invoice due in 60 days. If they choose to be paid 45 days early, the discount is worked out for those 45 days only. Choose 20 days early and the discount is smaller. The supplier always sees the gross amount, discount and net proceeds before confirming. Actual rates depend on each buyer's programme.
Dynamic Discounting vs Supply Chain Finance
| Dynamic discounting | Supply chain finance | |
|---|---|---|
| Who funds | The buyer's own cash | A bank or third-party funder |
| Who earns the discount | The buyer | The funder |
| Debt created | None | May be treated as debt-like |
| Supplier credit checks | None | Usually onboarding checks |
Frequently Asked Questions
What is dynamic discounting?
Dynamic discounting is a way for a buyer to pay a supplier's approved invoice before its due date in exchange for a discount. The discount slides with time: the earlier the payment, the larger the discount, and the closer to the due date, the smaller it becomes.
How is the discount calculated?
The discount is usually an annualised rate applied to the invoice amount for the number of days paid early. For example, at an illustrative annual rate, an invoice paid 30 days early earns roughly half the discount of one paid 60 days early. The supplier sees the exact figure before accepting.
Is dynamic discounting a loan?
No. The buyer is paying its own invoice early using its own cash, so the supplier takes on no debt and there is no credit check on the supplier.
How is it different from supply chain finance?
In supply chain finance (reverse factoring) a bank or funder pays the supplier and the buyer repays the funder later. In dynamic discounting the buyer funds the early payment from its own cash and keeps the discount as a return on that cash.
What do buyers gain?
A predictable, low-risk return on surplus cash, stronger supplier relationships and a more resilient supply chain, without adding debt to the balance sheet.
What do suppliers gain?
Faster access to cash on invoices already approved by their customer, on their own timetable, with the cost shown upfront and nothing to install.
Does it work with our accounting system?
PegaTrade Finance connects to the buyer's ERP to collect open, approved invoices and writes back only the payment date and discount value. Xero is our first connection, with others following.
