Intercompany financing: alternative financing method for franchisees?

Introduction
Intercompany financing: relaxation of banking monopoly principle
Diversification of financing sources for franchisees?

Introduction

Article L511-5 of the Monetary and Financial Code sets out the banking monopoly principle, under which no person other than a credit institution or financing company can perform credit transactions on a customary basis. A breach of this rule may entail criminal penalties relating to the illegal conduct of the banking business (ie, three years' imprisonment and a fine of €375,000).

This overriding principle which governs credit transactions in France has been relaxed over time in order to allow for, among other things:

• intragroup financing;
• crowdfunding;
• the granting of loans by private equity funds to their portfolio companies; and
• transactions with electronic money institutions.

Among the more recent derogations to the rules are those of 2015 (which were part of the Macron Act) and 22 May 2019 (which are known as the Pacte Act) concerning the growth and transformation of undertakings. These laws made it possible for micro-enterprises and small and medium-sized enterprises (SMEs) to obtain financing from companies with which they have economic links. The implementing decrees adopted pursuant to these acts have made it clear that 'economic links' within the meaning of the law includes franchise agreements.

Intercompany financing: relaxation of banking monopoly principle

The Macron Act introduced Paragraph 3bis to Article L511-6 of the Financial and Monetary Code, which is particularly relevant to the financing of franchisees by their franchisors. These provisions were further relaxed by the Pacte Act.

In order to undertake intercompany financing, the following conditions must be met:

• The lending company must be a corporation or private limited liability company and its accounts must be certified by an auditor.
• The loan cannot be granted for a period longer than three years.
• The borrower must be a micro-enterprise or an SME.
• The loan cannot lead the lender to grant payment terms in excess of the mandatory payment terms (under French law, payment terms for the sale of goods or services cannot in principle exceed 60 days from the date of the invoice).
• The lender must have a net equity which is higher than its share capital and its gross operating profit for the two fiscal years prior to the loan must have been positive.
• The lender must have had a positive net cash position in the two fiscal years prior to the loan.
• The aggregate amount of loans granted by the lender in any financial year cannot exceed the lower of:
  • 50% of the lender's net cash or 10% on a consolidated basis; or
  • €100 million (if the lender is a large company).
• The aggregate amount of loans granted by the lender to a particular borrower (eg, a franchisee) cannot in principal exceed in any fiscal year the higher of:
  • 5% of the lender's net cash; or
  • 25% of the lender's net cash, up to €10,000.

French law makes no distinction between French or foreign companies as lenders, but it is clear that loans which are granted by foreign companies and fulfil the above conditions will be accepted by derogation from the banking monopoly principle.

Diversification of financing sources for franchisees?

When the above derogation on intercompany financing was introduced in the Macron Act in 2015, the rationale was that the quantitative easing implemented by central banks and the facilitation of the granting of bank loans to businesses would soon come to an end. However, in reality, quantitative easing has continued, which explains why franchisees continue to prefer traditional bank loans when financing the establishment of their business and their working capital requirements.

Beyond this economic situation, critics have highlighted some weaknesses in the provisions introduced by the Macron Act. In particular, the granting of short-term loans by a franchisor to a franchisee should not lead to a circumvention of the rules on payment terms, which are now strictly regulated under French law (no more than 60 days from the date of the invoice).

Further, the amounts which can be lent by franchisors on an annual basis may be deemed too low in view of the occasional financing requirements of franchisees.

Finally, the law specifies that the granting of a loan under these special provisions should not make the borrower (ie, franchisee) economically dependent on the lender, which may be a delicate issue in the context of franchising relationships.

It remains to be seen whether these new provisions are adequate for franchisor-franchisee relationships. In any event, caution is required when granting loans or credit terms, as franchisors must avoid any kind of interference or de facto management of their franchisees (for further details please see "Risks to franchisors when franchisees are in serious financial difficulties").

For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (mellerio@aramis-law.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.