International expansion exposes companies to a major risk: non-payment. To secure their transactions and preserve their cash flow, exporters have a number of guarantee mechanisms at their disposal. Factoring and order confirmation are two solutions that are often considered, but which are fundamentally different in their approach and implications. Both are based on an ancient legal concept, the del credere - originally derived from the commissionaire contract - which needs to be properly understood if an informed choice is to be made. Choosing between order confirmation and factoring is a strategic decision that often requires the expertise of a lawyer specialising in banking and finance law.
Understanding banker's drafts: foundations and modern applications
A del credere is essentially a payment guarantee provided by a third party, usually a bank or financial institution, to a seller. Historically derived from the practice of commission contracts, where an intermediary guaranteed to his principal the successful completion of a deal, the bank del credere has been adapted to the requirements of modern commerce. It is not a simple guarantee, but a principal and autonomous undertaking, generally for consideration, under which the bank undertakes to pay the creditor if the principal debtor defaults. The del credere undertaking not only covers the debtor's insolvency, but also guarantees payment on the agreed due date.
Legally, del credere is defined as a credit transaction by signature. The banker does not lend money directly, but pledges his credibility and financial strength to cover a financial risk. This guarantee is consensual, which means that it arises from the agreement of the parties, and its scope is defined by the contract. It may cover a simple failure to pay on the due date, or be limited to legally established insolvency. To gain a deeper understanding of the mechanisms, legal nature and application of this guarantee, it is essential to master the basics of bank del credere.
Factoring as a financing and del credere guarantee solution
Factoring is a comprehensive financial management solution offered by a specialised company, the factor (sometimes called a factor), often a subsidiary of a major bank. It is particularly popular with companies wishing to outsource the management of their trade receivables while optimising their cash flow. Before making a comparison, it is important to understand how factoring works in detailwhich combines financing and a guarantee against non-payment. The instrument is based on three pillars.
The first pillar is financing. The company transfers its trade receivables (its invoices) to the factor, who in return immediately advances a significant part of their amount, in a similar way to receivables discounting. This transforms term receivables into immediate cash. The second pillar is trade receivables management. The factor takes charge of the monitoring, dunning and collection of receivables, relieving the company of an often cumbersome and complex administrative task.
The third pillar is the del credere guarantee. Under a non-recourse factoring contract, the factor assumes the del credere risk, i.e. the risk of final loss. If a customer fails to pay an invoice due to proven financial difficulties, the factor compensates the company (supplier or service provider) up to the guaranteed amount, which can be as much as 100% of the receivable. The del credere guarantee is part of a global service and applies to receivables that have already arisen, evidenced by an invoice. The factor becomes the buyer's del credere in favour of the seller.
Order confirmations: an autonomous and strategic guarantee for exports
Order confirmation is a more targeted and less well-known guarantee mechanism than factoring. It is used much earlier in the commercial process, even before goods are manufactured or dispatched. Its primary objective is not financing, but the pure and simple securing of a specific transaction. Less well known than factoring, it is important to find out about all the different types of factoring. the specifics of order confirmationincluding its status as an independent guarantee.
In practical terms, when an exporter receives an order from a buyer whose creditworthiness is uncertain or who is located in a high-risk geographical area, it can appoint a specialised agent, a "confirming" company. This entity, often a bank subsidiary, analyses the risk and, if it accepts, makes a firm and irrevocable commitment to pay the exporter the amount of the order on the agreed due date, whether or not the end buyer honours its debt. The order confirmation contract includes a del credere clause whereby the confirming company waives its rights of recourse against its principal (the seller), except in the event of non-conformity of the delivery.
This commitment is direct and is similar to an autonomous guarantee, the robustness of which is similar to that of the irrevocable documentary credit. It is therefore disconnected from any commercial disputes that may arise between the seller and the buyer, except in cases of obvious fraud or flagrant non-compliance with the terms of the order (e.g. non-delivery). This technique is appropriate for one-off sales of above-average value or for entering new markets. It allows the seller to launch production with the certainty of being paid.
In-depth comparison: factoring vs. order confirmation
Although both mechanisms incorporate a form of del credere, their purposes and procedures differ in key respects. The choice between the two depends on the company's commercial strategy and financial needs.
Nature and timing of the intervention
The most fundamental difference lies in the point at which the guarantee is granted. Factoring takes place downstream of the transaction, after the invoice has been issued. It covers existing receivables. Order confirmations, on the other hand, come into play upstream, as soon as the sales contract is concluded. It guarantees a future transaction, securing the deal even before the seller has incurred significant costs. The confirmer's commitment is an autonomous guarantee, whereas the factor's commitment, although robust, remains linked to the existence and validity of the underlying debt.
Scope of services
Factoring is an integrated solution: financing, receivables management and guarantees. It meets a global need for receivables management. The main advantage of factoring is its integrated nature, offering both security and liquidity. Order confirmation is a targeted service, focused exclusively on mitigating the risk of non-payment for a given deal. It does not include systematic financing (although the promise to pay may make it easier to obtain a mobilisation loan), or collection management, which remains the responsibility of the seller.
Cost structure
Remuneration models reflect this difference in scope. For factoring, the cost generally breaks down into two parts: a factoring commission, calculated as a percentage of the sales assigned, which covers management and the guarantee; and a financing commission, based on an interest rate, which remunerates the cash advance for its duration. For order confirmation, the cost is simpler: a single commission, calculated as a percentage of the amount of the guaranteed order. This amount varies according to the buyer's country and creditworthiness, and represents only the assumption of the risk of default.
Practical implications and strategic choices for sellers and exporters
The choice between these two instruments must be guided by a precise analysis of the company's needs. Factoring, whether traditional (known as full service factoring) or deconsolidating, is a structural solution, ideal for an SME that sells on a recurring basis to a diversified portfolio of customers and is looking both to secure its income and to improve its day-to-day cash flow. It is a long-term financial management tool.
Order confirmation is a tactical solution. It is perfectly suited to companies making one-off high-value sales, dealing with new business partners or exporting to countries considered unstable. It's surgical insurance that allows you to commit to a specific contract with complete peace of mind. However, it should be borne in mind that it does not solve short-term cash flow needs. In addition to these two options, which are the most common for export business, the decision to choosing the right export guarantee depends on many factors specific to international trade.
Role and expertise of companies specialising in receivables guarantees
Whether they are factors or confirming companies, these players are experts in credit risk assessment, a skill they share with credit insurance players. Their work is based on an in-depth analysis of the buyer's creditworthiness and the economic context of the destination country. By calling on their services, you not only transfer the risk of non-payment, but also benefit from their expertise in assessing the reliability of a trading partner with whom you are newly exposed to risk.
Negotiating contracts with these entities does, however, require particular vigilance. Clauses relating to the scope of cover, grounds for exclusion (commercial disputes, fault on the part of the seller responsible for poor performance of the contract), reporting deadlines and the amount of commission must be examined carefully. Legal advice is often essential to ensure that the policy you take out meets your company's needs. Support from experts is often useful in navigating the different types of insurance available. receivables financing solutions available to companies.
Legal perspectives and recent case law on payment guarantees
Case law, particularly that of the Civil and Commercial Division of the Cour de Cassation (French Supreme Court) in relation to independent guarantees, tends to reinforce the security of beneficiaries. The courts regularly confirm the principle of the unenforceability of exceptions, which prevents the guarantor from invoking problems relating to the basic contract (for example, a defect in the quality of the goods) to refuse payment. The guarantor's commitment is at "first request", and can only be blocked in the event of fraud or manifest abuse, the proof of which, from the debtor's point of view, is difficult to provide.
This rigorous approach, which is in keeping with the spirit of the law on guarantees, makes instruments such as order confirmations highly effective. However, it also requires great precision in the drafting of contracts. Every word counts in defining the conditions under which the guarantee is triggered and the rare cases in which the guarantor could be released from his obligation, such as the creditor's failure to perform on the agreed date. An analysis of recent decisions shows that judges pay close attention to the wording of the undertaking to determine its scope.
For a personalised analysis of your situation and the implementation of the most appropriate guarantee contract, our firm offers you its expertise in banking and financial law.
Sources
- Monetary and Financial Code
- Commercial code
- Civil Code
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