Bank discounting (escompte bancaire), as outlined in our general overview of this mechanism, relies on the mobilisation of a receivable before its due date. For a receivable to be eligible for discounting, it must generally be embodied in a specific instrument that the business remits to its bank. The nature of this instrument is far from neutral: it determines not only whether discounting is feasible but also the extent of the rights and guarantees the bank will enjoy – and, by extension, the obligations and risks for the remitting business.

While in theory any certain and liquidated receivable could be advanced upon, banking practice confines discounting to well-defined instruments offering sufficient guarantees of recovery. Which instruments will your bank accept (or refuse) to discount? Primarily, these are negotiable instruments (effets de commerce) and, to a lesser extent, cheques. Understanding the characteristics and stakes specific to each type of instrument is essential.

Negotiable instruments: the preferred vehicles for discounting

French law provides no single statutory definition of a « negotiable instrument » (effet de commerce). Legal scholarship generally defines it as a negotiable title evidencing, for the benefit of its lawful holder, a monetary claim, and serving as a means of payment. These instruments are designed to circulate easily (by endorsement) and offer specific guarantees to successive holders through the rules of the law of negotiable instruments (droit cambiaire). The principal negotiable instruments used in discounting are the bill of exchange, the promissory note, and the warrant.

The bill of exchange: the historical instrument

The bill of exchange (lettre de change), sometimes called a « draft » (traite), is arguably the most emblematic instrument associated with discounting. Historically, the discounting operation developed around it. It rests on a triangular relationship: one person (the drawer, typically the seller/supplier) orders another person (the drawee, the buyer/client) to pay a specified sum on a future date (maturity) to a designated beneficiary (who may be the drawer or a third party, such as the discounting bank).

For a business seeking to discount a bill of exchange, several points merit attention:

  • Acceptance: The drawee may « accept » the bill of exchange by affixing their signature. By doing so, they acknowledge the debt and personally undertake to pay the holder at maturity. An accepted bill offers greater security to the discounting bank. However, acceptance is neither a condition of validity nor a prerequisite for discounting. A bank may well discount an unaccepted bill, though it then assumes additional risk, often offset by a specific commission.
  • The pro forma draft: In certain situations – notably public procurement contracts or where the drawee refuses on principle to have bills drawn upon them – practice has developed « pro forma drafts. » These are bills of exchange, often unaccepted and not intended to circulate, remitted to the bank solely to materialise the receivable and enable discounting. Case law recognises their validity. The bank acquires ownership of the underlying claim (the provision), but its security rests essentially on that claim. It must therefore exercise particular vigilance regarding the reality and enforceability of the corresponding performance (goods delivered, works completed).
  • The danger of accommodation bills: This is a dangerous and unlawful practice. An accommodation bill (effet de complaisance) is a bill of exchange (or other instrument) created and accepted where no genuine debt or commercial transaction exists between drawer and drawee. The sole purpose is to allow the drawer to obtain credit by discounting the bill, often with the intention of repaying through a new accommodation bill (known as « kiting » or cavalerie). Such bills, founded on an absence of cause or an unlawful cause, are void. However, this nullity is not enforceable against a good faith holder (one ignorant of the fictitious nature of the transaction). A bank that discounts an accommodation bill knowingly (bad faith) loses its rights under the law of negotiable instruments and may incur liability, or even face prosecution for complicity in fraud. The bank’s bad faith is strictly assessed by the courts: what is required is awareness of causing harm to the debtor by depriving them of a legitimate defence. Mere negligence or imprudence does not suffice to establish bad faith. For the business, issuing or accepting such bills carries considerable risks.
  • The computerised bill of exchange (LCR): To reduce processing costs, computerisation led to the creation of the LCR (lettre de change-releve). The « paper LCR » rests on an actual physical bill of exchange whose details are then processed electronically; it remains fully discountable because the instrument exists and can be endorsed. By contrast, the « magnetic LCR » is created directly on electronic media, without any paper instrument being issued. The prevailing scholarly view holds that it does not constitute a genuine negotiable instrument in the traditional sense. Consequently, it cannot be discounted in the strict sense (no endorsement possible, no transfer of negotiable instrument guarantees). Financing operations based on magnetic LCRs fall under other techniques (collection mandate, assignment of receivables of the Dailly type). It is therefore essential to distinguish clearly between these two forms.

The promissory note

The promissory note (billet a ordre) is another negotiable instrument frequently discounted. Unlike the bill of exchange, it involves a direct undertaking rather than an order to pay. One person (the maker/subscriber) undertakes to pay a specified sum, on a fixed maturity date, to another person (the beneficiary) or to their order. It rests on a bilateral relationship. The rules governing its creation, transfer by endorsement, and payment closely mirror those of the bill of exchange, and it therefore offers comparable guarantees for discounting.

The warrant

The warrant is a more specialised type of negotiable instrument, used principally in the agricultural sector or for goods stored in general warehouses (magasins generaux). It combines a promissory note (promise to pay) and a pledge over the goods concerned. Discounting a warrant thus provides the bank, in addition to the standard rights under the law of negotiable instruments, with a security interest (sûreté réelle) over the pledged assets. Its complexity and narrower field of application make it less common than the bill of exchange or promissory note in general business discounting operations.

Cheque discounting: a validated but specific practice

At first glance, the idea of discounting a cheque may seem surprising. French law defines the cheque as a payment instrument payable on sight (a vue). In theory, it should be paid upon presentation and carries no future maturity date allowing credit by anticipation.

Yet the banking practice of « cheque discounting » exists and has been validated by case law. Why? Essentially to meet the needs of businesses that receive cheques but whose actual collection may take several days (interbank clearing delays). To avoid this cash-flow gap, the bank may agree to credit its client’s account immediately for the cheque amount, for a fee, before having received funds from the drawer’s bank.

Although sometimes termed « discounting, » this operation more closely resembles an advance on collection or a very short-term credit facility, secured by the remittance of the cheque. The bank bears a risk: that the cheque is returned unpaid (insufficient funds, opposition, etc.). In that case, as with a negotiable instrument, it will turn against its remitting client, notably through re-debiting (contre-passation).

Vigilance is required on certain points:

  • Post-dated cheques: Issuing a cheque bearing a future date (post-dating) is illegal in France. The cheque remains payable on sight regardless of the date inscribed. A bank that agreed to « discount » a cheque by reference to a future date would be committing an irregularity.
  • Postal cheques: Since the evolution of La Banque Postale’s status, the postal cheque is subject to the same legal regime as the bank cheque and may therefore be the subject of the same advance-on-collection operations.

Cheque discounting, while possible, is therefore a very short-term cash facility rather than a true discounting operation in the sense of the law of negotiable instruments.

Instruments excluded from traditional discounting

Certain instruments, though representing a value or a receivable, are generally not eligible for traditional bank discounting:

  • Documents of title to goods: Bills of lading (maritime transport), consignment notes (land transport), or warehouse receipts represent a right over goods rather than a monetary receivable directly mobilisable through discounting. Other stock-financing techniques exist for these.
  • Equity and investment securities: Shares, bonds, partnership interests, or fund units are not term payment instruments and their value fluctuates. They cannot be discounted. They may, however, serve as collateral (pledge of securities account) for other forms of credit.
  • The Dailly assignment of professional receivables: Created by the Dailly Act of 1981 (codified at Articles L. 313-23 et seq. of the French Monetary and Financial Code), the Dailly bordereau enables a business to assign or pledge a pool of professional receivables to its bank to secure a credit operation. Although it permits the mobilisation of receivables, the Dailly bordereau is not a negotiable instrument. It is governed by its own legal regime, distinct from discounting. The transfer of receivables and associated guarantees (notably the assignor’s joint and several guarantee, absent a contrary clause) are governed by these specific provisions and not by the law of negotiable instruments. One must not confuse discounting a negotiable instrument with mobilising receivables via a Dailly bordereau, even though the economic objectives may be similar.

In summary, while negotiable instruments – and the bill of exchange in particular – form the core of discounting operations, the possibility of obtaining an advance on cheques also exists. Each instrument has its own characteristics, advantages, and risks. Vigilance is required as to the regularity of instruments remitted (particularly the absence of accommodation) and a proper understanding of the underlying legal mechanisms, especially the remitter’s liability in case of non-payment. A sound knowledge of these various instruments and their treatment by banks is an asset for optimising cash management and securing financial relationships. For a comprehensive overview, consult our practical guide on discounting.

The nature of the instrument presented for discounting has significant legal implications. In case of doubt regarding an instrument’s eligibility or a dispute concerning a discounted bill, our firm is at your disposal to analyse your situation and advise on the best course of action. You may contact our team via our Banking Law – Discounting page.

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