For any company, especially one in a growth phase, securing cash flow and protecting against non-payment is a constant challenge. Bank discounting is a well-known short-term financing technique. Its "non-recourse" or "fixed price" variant (also known as forfaiting), however, remains less well known, even though it offers an almost total transfer of the risk of default from the customer to the bank. This mechanism is based on a specific and powerful guarantee: the bank del credere. Understanding how it works, its legal implications and the support it is based on is essential for any manager wishing to optimise his or her financial management. As these arrangements are complex to put in place, they may require the assistance and advice of a lawyer who is an expert in banking law to ensure that the terms are secure.
Understanding banker's drafts: definition, nature and role in financial transactions
A bank del credere is a payment guarantee provided by a credit institution. Through this commitment, the bank insures a creditor, typically a seller or supplier, against the insolvency of its debtor, the buyer. Unlike other guarantees, del credere is not subject to any specific legal regime under French law. Its definition and contours have therefore been shaped by doctrine and practice. It is a credit transaction, qualified as a commitment by signature within the meaning of article L. 313-1 of the French Monetary and Financial Code, in which the institution "lends" its credibility to provide cover against a specific risk of non-payment.
Legal definition and characterisation of banker's del credere
In legal terms, the bank's del credere is most often materialised through the techniques of exchange law, such as the endorsement given on a bill of exchange (a draft, for example) or, more typically, in the context of a "fixed price" discount. This is an agreement whereby the bank, in return for a commission, undertakes to pay the creditor if the principal debtor defaults. The objective is clear: this commitment is consensual, i.e. it arises from the sole will of the parties, without any particular formality. The bank makes a direct commitment to the creditor, which is one of its fundamental characteristics and distinguishes it from other forms of guarantee.
Ducroire vs. surety, credit insurance and factoring: crucial distinctions
Although it is a guarantee, del credere should not be confused with surety bonds, credit insurance or solutions such as factoring. The difference with a guarantee is decisive: the guarantor makes a commitment ancillary to the principal debt, often free of charge and in the interest of the debtor. The del credere banker, on the other hand, makes a principal commitment against payment under a service contract with the creditor. His obligation is autonomous and not accessory to the initial debt. It also differs from credit insurance or factoring, which are based on risk pooling and statistical analysis. The del credere is an individualised guarantee, relating to a specific financing transaction such as discounting, where the bank assesses the quality of a specific debtor rather than a portfolio of risks.
Fixed-price discounting (without recourse): mechanism and specific features of forex transactions
Fixed-rate discounting is the most emblematic application of bank del credere. In a traditional discounting transaction, if the final debtor fails to pay the bill on the due date, the bank takes recourse against its customer (the drawer of the bill) to recover the advance granted. In fixed-rate discounting, the bank expressly waives this right of recourse. It therefore assumes sole responsibility for the risk of the debtor defaulting, offering the seller definitive security of payment. In practical terms, this means that the seller will not have to reimburse the bank if the bill remains unpaid.
Operation of fixed-price discounting and waiver of the banker's rights of recourse
The central mechanism of non-recourse discounting, also known as forfaiting, is the "forfaitisation" of the debtor's signature. The financial institution assesses the creditworthiness of the final debtor and, on the basis of this risk, agrees to finance the debt while waiving its foreign exchange recourse against the seller. This waiver is an "extra-cambitory" agreement, meaning that it is only valid between the institution and its customer. If the bill were to circulate and be held by a third party, the latter would retain all its recourse against all the signatories. For this reason, banks generally exclude bills that have already been circulated from this arrangement. It should be noted that this waiver never covers the seller's fault: if the debt is based on a fictitious invoice or an unfulfilled contract, the bank retains its right to take action against its own customer.
Currency and non-currency instruments: bills of exchange, promissory notes and trade receivables
Traditionally, fixed-price discounting is based on commercial instruments such as bills of exchange or promissory notes. The law governing bills of exchange organises solidarity between all the signatories of the bill, guaranteeing the final bearer multiple possibilities of recourse in the event of non-payment. The "non-recourse" clause is a contractual exception to this fundamental principle. The arrangement may also relate to trade receivables assigned under the Dailly Act. There is an important legal nuance to this situation. Article L. 313-24 of the French Monetary and Financial Code provides that the assignor is "jointly and severally liable for payment of the assigned receivables". However, as this provision is not a matter of public policy, the non-recourse discount financing agreement allows this legal guarantee to be set aside. This is known as an assignment without recourse, where the bank contractually waives the benefit of the joint and several guarantee that the law offered.
Legal and practical implications of non-recourse discounting for businesses
For a company, opting for non-recourse discounting is not just a financing decision, but a genuine risk management and balance sheet optimisation strategy, with a direct impact on working capital. This technique makes it possible to transform a customer receivable, which by its very nature is uncertain, into immediate and definitive liquidity.
Strategic benefits for treasury and risk management
The most obvious benefit is improved cash flow. The company receives the amount of its invoice, less charges, without waiting for the payment due date. More importantly, it transfers the entire risk of non-payment to the credit institution. If the customer does not pay, the company has nothing to repay. This main advantage is particularly valuable in international trade (export). For an exporter, it is a guarantee against country risk and the hazards associated with a foreign customer, whose collection is complex. In addition, by removing the receivable from its assets (trade receivables), the company improves the presentation of its balance sheet. This accounting treatment, known as deconsolidation, can facilitate access to other forms of credit.
Contractual terms and remuneration of the del credere banker
This security is more expensive than the traditional discount. The del credere commitment is an expensive service. Its remuneration is generally made up of two elements. Firstly, the traditional agios, which represents the interest rate on the cash advance. Secondly, a specific "del credere commission", which remunerates the bank for assuming the risk of non-payment. The amount of this commission, sometimes calculated on a fixed rate, is freely negotiated and depends directly on the financial strength of the final debtor, the term of the loan and the economic climate. The contract must be examined carefully, as it may impose obligations on the creditor in terms of due diligence or the provision of documents, failure to comply with which could render the guarantee ineffective.
Implementation of the del credere guarantee and grounds for exoneration of the bank
Activation of the del credere guarantee is not always automatic. The financial institution has means of defence to avoid its obligation if the beneficiary creditor has not respected its own commitments, whether contractual or legal.
Triggering the guarantee: from default to insolvency
The conditions for triggering the guarantee are defined in the contract. The wording is crucial here. The triggering event may be a simple failure to pay on the due date, with no need to prove the debtor's insolvency. This is the most suitable solution for the creditor. In other arrangements, the agreement may stipulate that the guarantee will only be activated once proven insolvency has been established, for example by the opening of receivership or bankruptcy proceedings, or after the failure of initial collection attempts as evidenced by a statement of default.
Exonerating circumstances: fault, fraud on the part of the creditor and set-off
The del credere bank is released from its commitment and liability in three main situations. Firstly, the creditor is at fault. If the debtor refuses to pay because the commercial contract has not been properly performed (undelivered or non-conforming goods, defective service), the creditor cannot rely on the guarantee. The bank only guarantees payment of a claim that is assumed to be valid and due, not the proper performance of a commercial contract. Secondly, fraud by the creditor. Any manoeuvre aimed at obtaining an undue payment, such as the presentation of fictitious invoices or falsified documents, obviously invalidates the guarantee and exposes the perpetrator to legal action. Finally, set-off can extinguish the debt. If the final debtor is itself a creditor of the bank, the reciprocal debts may be extinguished. The bank is then released from its del credere obligation, since the principal debt no longer exists.
Fixed-rate discounting, backed by the del credere guarantee, is a powerful financial tool for any company's growth. It offers unrivalled visibility and cash flow security, quite distinct from non-recourse factoring, which is another technique for assigning receivables. Its implementation requires precise contractual negotiation and a perfect understanding of its legal subtleties. To audit your contracts, choose the solution best suited to your needs or secure your credit transactions, our firm can provide you with recognised expertise and tailor-made financial advice in banking and finance law.
Sources
- Monetary and Financial Code
- Commercial code
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