Over the past several years, many states have considered and enacted requirements requiring commercial financing providers to give disclosures when extending commercial financing. These disclosures would cover not only traditional business-purpose loans, but also other types of commercial financing, such as lease financing, merchant cash advance, and factoring. So far, California, New York, Florida, Georgia, and Virginia have enacted some form of commercial financing disclosure law. Connecticut and Kansas are now following the trend and have passed laws requiring commercial financing disclosures.

Connecticut

Last year, Connecticut enacted a commercial financing registration and disclosure law that will require providers of sales-based financing to give disclosures to businesses seeking financing and would impose some restrictions on commercial financing transactions, beginning July 1, 2024. Additionally, commercial financing providers and brokers must register with the Connecticut Department of Banking by October 1, 2024.

Scope and Application of the Law

The law defines "sales-based financing" as a transaction that is repaid by a financing recipient over time either (1) as a percentage of sales or revenue or (2) according to a fixed payment mechanism that provides for a reconciliation process, which adjusts the payment to an amount that is a percentage of sales or revenue. For example, a merchant cash advance or a future receivables purchase transaction might qualify as sales-based financing.

The registration and disclosure law applies to financing amounts up to $250,000. Exempt from the registration and disclosure requirement are banks and other financial institutions, a person who brokers or extends commercial financing secured by real property, and a person who extends no more than five commercial financing transactions in Connecticut within a 12-month period, among others.

Disclosure Requirement

A commercial financing provider must give disclosures to a recipient of financing when a specific offer of financing is extended and must obtain the recipient's signature on the disclosure. These disclosures generally must contain the following information, although they may vary based on the details of the commercial financing transaction:

• The total amount of commercial financing
• The disbursement amount
• The finance charge
• The total repayment amount
• The estimated time period required for periodic payments
• The payment amounts and frequency; or a payment schedule and the amount of the average projected payments per month
• A description of all other potential fees and charges not included in the finance charge
• Any finance charge the recipient is required to pay if the recipient prepays the repayment amount, with some exclusions
• Any additional fees, not already included in the finance charge, if the recipient prepays the repayment amount
• A description of collateral requirements or security interests
• Whether the provider will pay compensation directly to a commercial financing broker out of the financed amount and, if so, the amount of the compensation
• If the provider requires the recipient to pay off the balance of an existing commercial financing from the same provider, the amount of the new commercial financing that is used to pay off the portion of the existing commercial financing that consists of prepayment charges required to be paid and any unpaid interest expense that was not forgiven at the time of renewal

Guidance and Disclosure Form from the Connecticut Department of Banking

The law is enforced by the Department of Banking and requires the Department of Banking to create a disclosure form for commercial financing providers' use. Just weeks before the July 1, 2024 effective date for the disclosure requirement, the Department of Banking published guidance and the commercial financing disclosure form. Given the limited amount of time commercial financing providers would have to integrate the disclosures into their lending programs, the Department of Banking issued a "no-action position," stating that the Department of Banking will not take enforcement action for a provider's failure to provide the required disclosures for specific offers of commercial financing issued from July 1 to September 30, 2024. Essentially, providers have until October 1, 2024 to comply with the disclosure requirement.

The disclosure form resembles Virginia's Sales-Based Financing Disclosure. One key difference between Connecticut's and Virginia's disclosures, however, is the inclusion in Connecticut's disclosure of details for renewal financing transactions, specifically, how disbursement amounts are used to pay off an existing balance. This was a gap in Virginia's disclosure, as it does not contemplate that part of the financing might be used to pay off outstanding balances with the provider or with other creditors. Without this information, the Virginia disclosure could become confusing, as funding recipients might receive a lower amount than what the disclosure states they should receive.

Substantive Restrictions on Commercial Financing Providers

The law also places substantive restrictions on commercial financing providers. A description of these restrictions is included on the Department of Banking's disclosure form, specifically that:

The commercial financing restrictions will become effective on July 1, 2024, and are not included in the Department of Banking's no-action position. Accordingly, commercial financing providers should update their agreements to ensure that they are consistent with these restrictions.

Kansas

Kansas is the latest state to enact a Commercial Financing Disclosure Act, which is effective upon publication in Kansas's statute book, on July 1, 2024. The law appears to be modeled after similar commercial disclosure laws in several of the other states and, thus, is familiar to those who have been providing similar disclosures under other states' laws. The Kanas law requires a commercial financing provider to disclose to a business receiving financing the terms of the commercial financing transaction before or at the time of consummating a commercial financing transaction.

Scope and Application of the Law

The disclosure requirement will apply to "commercial financing transactions," which includes any commercial loan, accounts receivable purchase transaction, and commercial open-credit plan. The law defines "accounts receivable purchase transaction" broadly as a transaction in which a business forwards or otherwise sells to a provider all or a portion of the accounts of such business, cash receipts, or payment intangibles at a discount to the expected value of such accounts or payment intangibles. This would likely include factoring transactions and sales-based purchase transactions (e.g., merchant cash advance).

Exempt from the commercial financing disclosure requirements are depository institutions and their affiliates (with some limits), transactions secured by real property, providers that consummate no more than five commercial financing transactions in Kansas in a 12-month period, and transactions of more than $500,000, among others. Note that the definition of "provider" is "a person who consummates more than five commercial financing transactions to businesses located in [Kansas] in a calendar year," which likely means that the exemption with the rolling 12-month lookback would not be operative.

Disclosure Requirement

The disclosures must generally include the following information, although this may vary, based on the details of the commercial financing transaction:

• The total amount of funds provided
• The total amount of funds disbursed
• Total of payments
• Total dollar cost of financing
• Manner, frequency, and amount (or estimated amount) of each payment
• Whether there are any costs or discounts associated with prepayment

If the transaction is structured as a "commercial financing facility," then only one disclosure needs to be provided that is based on an example of a transaction that could occur under the agreement. A commercial financing facility is a plan that contemplates the purchase of multiple accounts receivable from the recipient over a period of time pursuant to an agreement. For example, if the provider were purchasing a business's invoices through a factoring agreement that would allow the business to sell various invoices to the provider from time to time, the provider would only need to give one disclosure, at the beginning of the transaction, based on an example, instead of giving a disclosure with each invoice purchase.

No Specific Disclosure Form or Template

The disclosure law does not specify a particular form or template for providing these disclosures or require the disclosures to be signed by the recipient. The disclosure law is enforceable only by the state attorney general, but it does not expressly provide the attorney general any authority to promulgate rules to implement the law. Accordingly, commercial financing disclosure templates used in other states that meet the requirements of Kansas's Commercial Financing Disclosure Act should satisfy Kansas's requirement.

Takeaways

Commercial financing disclosures remain a priority for a number of states, and it would not be surprising to see more states adopt commercial financing disclosure requirements. For example, several states have commercial financing disclosure bills that have passed either one or both of the states' legislative chambers, including Illinois, Missouri, and Maryland. Accordingly, companies engaging in commercial financing will want to stay alert to new commercial financing disclosure requirements as they are enacted and become effective.