Credit Factoring: Cash Financing.
When a company encounters a cash flow problem, two solutions come to it. Increase working capital or reduce working capital requirements. Often, when the increase in the WCR results from specific operations, the entrepreneur chooses the first option. For this, he has the opportunity to turn to his bank and apply for credit mobilization of trade receivables or MONCo.
What is a MONCo?
Trade receivables credit is a short-term financing technique created in 1967. Inspired by Gera-Pen credit mobilization practices, it is now used to modernize French short-term credit techniques.
For example, the MONCo consists of entrusting itself to an assignee (usually a bank) in order to obtain an advance on its claims against third parties. Thus, the goal is to be able to feed the cash and face deadlines for settlement.
How does the credit mobilization credit work?
The granting of a MONCo by the bank assumes above all the declaration of option by the customer, then the opening of credit, and finally the subscription of the promissory note.
Option declaration by the client
At the time an enterprise chooses a trade receivables credit, it must sign a declaration of option that assumes a waiver of the trade discount. Indeed, the same customer does not have the possibility to mobilize the same claim, both by a MONCo and a discount (this is what we call double financing). Then the statement will be forwarded to the BaFranc, which in turn, will check the situation. The degree of risk to be compared with the company’s estimates will be analyzed.
It should be noted that the option for this type of credit is revocable. As long as the company decides to no longer benefit from a MONCo, it can go back to the discount.
Opening of credit
Once the situation is analyzed and the doubts removed, the bank concludes a credit opening with its client. The credit will be in the form of a current account overdraft, and must comply with the rules laid down for this purpose (Article L. 313-12 of the French Monetary and Financial Code).
Subscription of the promissory note
As with discounting, the company issues a promissory note (also known as a “mobilization note”) on a limited date. This must be a minimum of 10 days and a maximum of 90 days from the date of its creation.
As a reminder, this is a writing that represents the advance made to the company (called subscriber) by the bank (beneficiary). It is not a question of a transfer of ownership, but of a “mobilized overdraft”. Thus, the mobilization note must contain:
- A denomination
- The promise to pay a fixed sum (in figures and letters)
- The term of the promissory note
- The date and place of creation of the ticket
- Benefits received for each claim
- Subscriber’s place of payment
- The name of the person to whom the payment is to be made
- The signature of the subscriber
Debt recovery in a MONCo
It must be remembered that the credit granted by the bank mainly corresponds to the amount of the company’s receivables, minus the agios, that is, the bank’s remuneration (interest and commissions). Master of payment, the company will thus be responsible for recovering its own invoices while following the procedure required for each type of recovery. And finally, she will pay the promissory note at maturity.
Exceptionally, the recovery can be supported by the bank.
However, like the bill of exchange, the promissory note may be payable in several ways: on a certain date, at a certain date or on sight.
MONCo Recipient Failure: What Remedies for the Bank?
In case of default of the beneficiary company, the bank has a recourse of common law based on the advance granted. Thus, it can exercise a recourse exchange based on the subscription of the promissory note. Having said that, appeal against the signatory (s) of the bill of exchange as they are jointly and severally liable for the payment.
In addition, the bank can obtain a refund of credit from the provisions agreed in the contract. How? ‘Or’ What ? By debiting the company’s account of the sum she had advanced to him.
In the event that the receivables are not materialized by a promissory note or drafts, the company can transfer its properties to the bank. The latter will then be responsible for collecting the receivables in the context of a Dailly transfer. All claims (invoices, fees, etc.) will be listed on the Dailly slip to avoid individualized drafts.
The benefits of a trade receivable credit
- Thanks to a MONCo, the company can group all its receivables on a mobilization effect. As a result, it will reduce your agios costs.
- The MONCo does not involve the transfer of the claims to the banker. The company remains the master of the amount of the note which equals the amount of the receivables mobilized. In addition, this can be called a “personalized credit” for the company.
- Initially, there were two types of MONCo: MONCo guaranteed and unsecured. The first included a pledge on the claims, but it was repealed by the law of 2 January 1981 (Dailly law). Today, all that remains is the unsecured MONCo, which is based solely on a relationship of trust between the bank and its client.