An ignored revolution in Macron law: trade credit

The Macron law marked the parliamentary and media debate on a certain number of measures to unlock the French economy. The wide challenge that has marginalized other certainly more helpful than those provisions which tend to open the coaching market to private enterprise. This is the case of Article 167 of the Macron law sounds like a small revolution in the world of banking and finance.

Freeing capital to meet the needs of SMEs

The provision is pragmatic and seeks to address two main issues:

– SMEs which are the main breeding ground for creating wealth and jobs in France, suffer from an urgent need for liquidity and cash flow to continue to exist;

– banks suffer from an excess of post-crisis regulation and experience some difficulty meeting their loan facilitator of trade to the economy especially with regard to SMEs.

Faced with a demand from borrowers on the one hand and the deficiency of the other banks, Article 167 of Macron law wants to offer companies a new source of financing by locating unused capital stocks in order to inject them there where the failure is dry. The idea came from a simple observation: since the financial crisis, many companies are protected by increasing their savings and reserves. Others, unfortunately, experience severe liquidity crises. Some companies are therefore in need of cash while others are funding capacity. The idea is to release the stock of capital in “sleep” in favor of the economic system in need of funding.

An alternative tool face rigidity of the banking monopoly

According to a close parliamentary folder, trade credit will allow the “real economy to lend to the real economy without going through the banks.” The text opens in effect a breach in the French banking monopoly that limits the lender’s activities to institutions that meet the legal and economic criteria established by law. Generally, two exceptions models oppose. The first model, used especially in Britain, considers that a person or entity may lend funds to another person provided that credit activity is not carried out professionally (criterion of the nature of the ‘activity). The second model, used most commonly in Germany and Italy, believes that the credit activity is free as long as the lender does not exercise this principal activity. We must see in this concept a regular character in the loan granting which should be understood as the repetition of a loan agreement to several borrowers (usually test). This last criterion, more rigid than that of Anglo-Saxon model, which is taken into the body and the spirit of the text.

Now, an exception to the banking monopoly, a company may, on an ancillary to its core business, make loans to another company. The intercompany funding thus appears as an alternative tool which can partially bear the inefficiency of bank financing.

Consolidate business relationships

Trade relations are widely punctuated by periods granted for payment by a supplier to the buyer client. The legal framework for payment deadlines set by the law modernizing the economy of 4 August 2008, however, has limitations that undermine many subcontractors. To support this population of SMEs lack of liquidity, the Macron law now allows a company to make a loan to another company without requiring ownership relationship between them (the intercompany financing already exists). Therefore, a principal may grant to its supplier (or its subcontractor) cash line in order to strengthen their business partnership and relieve the cash provider. The idea is simple: if my partner falls, it could cause me to his downfall. I prefer the financial support to avoid bankruptcy, which could lead mine.

Moreover, the inter funding could lead to a restructuring of business relationships between trading partners. The existence of credit necessarily involves risks that will be borne by the lending company. The management of these risks is based on a specific analysis work and global financial and commercial health of the borrower partner: financial analysis, market opportunities and studies of industrial strategy, policy research and development, compliance with certain social criteria etc. or environmental. The intercompany loan will require a sharing of strategic and confidential information between companies.

Sitting on solidarity among economic actors, Article 167 of the Macron law relies on contractual reciprocity, consolidation, and restructuring of commercial relations to sustainably fight bankruptcy situations.

The boundaries of the device

The device has many questions. The regime laid down by the new Article 511-6 of the Monetary and Financial Code and the Decree of 22 April 2016 contains many conditions that make the rigid device and the relatively narrow scope. In addition to the existence of a commercial relationship between the borrower and the lender and the ancillary nature to be taken by the lending activity, the intercompany loan will have a maturity of over two years. This requirement perfectly with the objective to bridge a cash deficit. However, this limit seems to contradict the need to finance an investment or a project that requires a longer credit maturity. The intercompany loan will not be able to meet this need financing without amendment or subsequent amendment. Moreover, capping the amounts of loans and the requirement of the accounting criteria for the lending business (R.511-2-1-2 the Monetary and Financial Code) may fail many candidates to trade credit.

Beyond its regulatory limits, trade credit is painfully greeted by some of the companies who fear that worsen a balance of power and the installation of an economic dependency between suppliers and customers. Only the commercial practice will be able to tell if this new device is effective or not.