On June 20, the Texas Legislature passed H.B. 700, which introduces several new regulatory requirements for providers and brokers of commercial sales-based financing operating within the state. The law applies to merchant cash advance transactions and loans with payments that vary based on the borrower’s sales.
Most significantly, the new law prohibits the establishment of automatic debit mechanisms from a merchant’s deposit account unless the finance company holds a validly perfected security interest in the account. This requirement poses a substantial operational challenge, because obtaining a security interest in a deposit account requires a control agreement with the merchant and the merchant’s bank.
We expect financing companies will explore alternative structures to avoid that requirement, such as using split processing agreements that do not involve debiting payments from the merchant’s account or shifting to traditional lending either with bank partners or a choice-of-law model.
The law also mandates consumer-like disclosures for commercial sales-based financing transactions, including disclosure of the total financing amount, finance charge, total repayment amount, estimated term, payment schedule, collateral requirements, additional fees, certain prepayment terms, and whether the provider pays compensation to a broker. The law does not require an APR disclosure. The law also requires providers and brokers to register with the Office of Consumer Credit Commissioner.
Louisiana’s Approach to Commercial Financing
In contrast, earlier this month Louisiana enacted its own commercial financing disclosure statute, HB 470, which does not include the stringent automatic debit requirement found in the Texas bill.
Louisiana’s legislation applies to revenue-based financing transactions, requiring consumer-like disclosures of certain terms, including the total amount of funds provided, the total dollar cost, the payment schedule, and certain prepayment terms.
These legislative developments highlight the evolving landscape of commercial financing regulation. We will continue to monitor these state legislative developments and provide updates.
