Dynamic discounting
Dynamic discounting lets a buyer pay supplier invoices early in exchange for a discount that slides with the payment date: the earlier the cash moves, the larger the discount. Unlike a fixed early payment discount such as 2/10 net 30, the rate is computed continuously, usually as an agreed annualized rate prorated over the days accelerated, and suppliers can opt in invoice by invoice.
Examples
Sliding scale: A $120,000 invoice on net 60 terms is approved on day 5 at a 10 percent annualized program rate. Paying on day 10 accelerates 50 days and earns a $1,667 discount; waiting until day 35 accelerates 25 days and earns $833.
Supplier's math: A casting supplier borrows on a 14 percent credit line. Taking a 10 percent dynamic discount to be paid on day 12 instead of day 60 costs $1,600 on a $120,000 invoice but avoids $2,240 of line interest over the same 48 days, so the supplier opts in every time.
Definition
The mechanics are simple. Buyer and supplier agree an annualized rate, and the discount on any invoice is that rate prorated over the days of acceleration: pay a net 60 invoice on day 20 at a 12 percent annual rate and the discount is 40 days' worth, about 1.33 percent. A fixed early payment discount is all or nothing; miss day 10 on 2/10 net 30 and the incentive vanishes, while a sliding scale keeps some incentive alive on every day before the due date.
Funding source is what separates it from supply chain finance: dynamic discounting spends the buyer's own cash, while reverse factoring brings in a third-party funder. That makes it attractive when corporate cash earns less than the discount rate, and wrong when the buyer needs its working capital elsewhere. Participation tracks supplier cash stress, so a small fabricator with Friday payroll takes the offer while a well-capitalized distributor ignores it. The pattern to avoid is stretching net terms from 30 to 75 days and then selling the time back as a discount program; suppliers notice, and the cost resurfaces in the next quote.
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