295 / 2024-04-24 10:54:13

Dynamic Discounting and Financial Flexibility

Supply chain finance, early payment discount, dynamic discounting, reverse factoring, FinTech

Dynamic Discounting and Financial Flexibility Dynamic discounting maintains some similarities with reverse factoring in that it is a form of accounts payable-centric financing that is buyer-led. However, dynamic discounting programs are often self-funded, meaning the buyer uses their available cash to pay suppliers directly. In addition, dynamic discounting solutions are solely offered by fintech firms because they do not require the participation of a bank or financing institution. Problem definition: This paper examines how dynamic discount financing, an innovative early payment scheme, can enhance supply chain efficiency by granting suppliers more control over payments, thereby optimizing liquidity and reducing financing costs. Unlike reverse factoring, dynamic discounting is buyer-led and self-funded, often facilitated by fintech firms without requiring bank involvement. Academic/practical relevance: With over 20% of Fortune 100 companies adopting on-demand early payment via FinTech platforms, understanding dynamic discount financing’s impact on working finance activities is crucial. This analysis adds to the academic literature by evaluating trade finance in the context of liquidity flexibility and dynamic discounting. Methodology: We develop a game-theoretic model to assess strategic interactions within supply chains facing operational and financial risks, comparing uniform discounts to dynamic discounting’s flexible, invoice-dependent rates. Results: Our model demonstrates that the value of dynamic discount financing critically depends on the interplay between its discount and flexibility advantages. When discount benefits outweigh flexibility, the latter enhances value. Conversely, when discount benefits are less pronounced, flexibility can independently drive supplier value, particularly under significant financial risk. Managerial implications: This study offers insights into when and how dynamic discounting should be implemented, highlighting its conditional benefits for supply chain finance and advising managers on strategic adoption to maximize value.