Cash management is a key concern for any business, whatever its size or sector of activity. Waiting for payment from customers can sometimes create significant financial stress. Bank discounting is one of the oldest and most common mechanisms used by French companies to obtain cash by mobilising their trade receivables before their due date. While it is a valuable financing tool, it also raises a number of practical and legal issues. The aim of this article is to provide you with a clear and accessible overview of bank discounting, to help you better understand how it works and the implications for your business.
What exactly is discounting?
Basically, discounting is an advance of funds granted by a bank to its corporate customer. In exchange for this advance, the company gives the bank a claim on one of its own customers that has not yet matured. This debt must be evidenced by a specific document, usually a commercial paper or cheque. The bank then pays the company the amount of the receivable, after deducting its own remuneration (interest and commission).
The main objective for the company is simple: to transform a future cash inflow into immediate cash. This makes it possible to bridge a cash flow gap, finance current expenditure or invest without waiting for the end customer to pay his bill. For a more detailed analysis of the definition and mechanism, see our article on bank discounting: definition, operation and challenges.
Which securities may be affected?
Not just any debt can be discounted. It generally has to be incorporated in a specific security. The most commonly discounted instruments are bills of exchange:
- The bill of exchange (or draft): This is the historic instrument of discounting.
- Promissory note: A direct payment undertaking by the subscriber.
Perhaps more surprisingly, cheques can also be discounted, even though they are normally payable "on demand".. Case law has validated this practice.
However, it is important to be aware that certain documents are not eligible for traditional discounting, such as simple invoices (which are more appropriately covered by factoring or Dailly assignment), securities representing goods (bills of lading, warrants in their function as collateral only) or equity securities (shares). Particular attention must be paid to the validity and regularity of the securities delivered, in particular to avoid the risk associated with artificially created "bills of convenience". To find out exactly which securities are eligible and what pitfalls to avoid, please refer to our guide to commercial paper and discountable cheques.
How does a discounting transaction work?
The discounting process generally follows a few key stages:
- Title presentation: The company presents the bill or cheque to its bank.
- The bank's decision : The bank examines the security and assesses the risk (solvency of the final debtor, situation of the remitting company). It is free to accept or refuse the discount.
- Agreement and delivery of title : If the bank accepts, an agreement is formed (often evidenced by a discount slip). The company physically delivers the instrument to the bank, usually by endorsing it (signature on the back transferring ownership).
- Advance payment : The bank credits the company's account with the amount of the bill of exchange, less its remuneration (agios, commission). The funds are then available.
Although this may seem simple, it is based on precise legal concepts such as the transfer of title and the exchange of consents, which are explored in more detail in our article on the how discounting works and the issues involved.
What happens if the end customer does not pay for the desired effect?
This is a crucial point: discounting does not transfer the risk of non-payment to the bank (except in the very rare case of "non-recourse" discounting). ). The company that received the advance remains the final guarantor of payment.. If, on the due date, the debtor of the bill (your customer) does not pay the bank, the bank has a number of remedies.
Its most direct and frequent recourse is to turn against you, its own customer. It generally does this using a technique called "reversal": it simply debits your current account for the amount of the unpaid bill. Under certain conditions, this is equivalent to the company repaying the advance. However, the bank must comply with certain rules in order to make a valid reversal, particularly in terms of deadlines and information. Details of banker's recourse and reversal are essential to understanding your obligations.
When should you call on the services of a lawyer in matters of discounting?
Although discounting is a common transaction, difficulties and disputes can arise. There are a number of situations in which it is advisable to consult a lawyer specialising in banking law:
- Refusal to discount deemed abusive by your bank.
- Disagreement on costs (interest rates, commissions) applied by the bank.
- Reversal by the bank that you consider irregular or abusive.
- Invoking your liability linked to a commercial instrument (suspicion of a bill of exchange, for example).
- A desire to secure your operations and better negotiate your discount terms.
A lawyer can analyse your situation, explain your rights and obligations, negotiate with the bank or, if necessary, defend you in litigation. Our firm has a practice dedicated to these issues and can assist you; please do not hesitate to contact our lawyer specialising in discounting and banking law.
Navigating the intricacies of discounting requires vigilance. If you have any questions or difficulties regarding your discounting operations or your banking relations, please do not hesitate to contact our firm.
Frequently asked questions
What is bank discounting in a nutshell?
Discounting is a transaction whereby a bank advances you the amount of a customer debt (in the form of a bill of exchange or cheque) before it falls due, in return for a fee. This enables you to obtain cash quickly.
What is the difference between discounting and cession Dailly?
Traditional discounting transfers ownership of a specific bill of exchange or cheque to the bank in order to obtain an advance. The cession Dailly makes it possible to cede or pledge a group of business receivables via a single slip, often to guarantee a wider credit line..
What types of documents can my bank discount?
Mainly commercial paper such as bills of exchange or promissory notesbut also cheques, even though they are payable on demand. Simple invoices or securities representing goods are not generally discounted via this mechanism..
What happens if my customer doesn't pay the effect I expected?
Unless there is a very specific agreement to the contrary ('non-recourse discount') ), you remain liable for payment. The bank will take action against you, often debiting your account for the unpaid amount via a "reversal"..
What is an effect of complacency and why is it risky?
It is a commercial paper created without any real commercial operation behind it, just to obtain credit artificially.. It is illegalcan be qualified as fraudThis exposes the company and its directors to sanctions and litigation.
Can the bank refuse to discount my bills?
Yes, the bank is not obliged to accept all items presented.. It assesses the risk associated with your customer (the drawee) and your own situation before making a decision.
When should I consult a lawyer about discounting?
It is advisable to consult a lawyer in the event of a dispute with your bank (refusal to discount, disputed charges, improper reversal), if you are accused of an irregular bill, or to ensure the legal security of your financing transactions.
EN 
FR