Following closely on the heels of a Georgia law enacted in May, Connecticut and Florida have become the latest states to enact laws requiring providers of small business financing to provide disclosures to recipients—and in Connecticut’s case, to require certain commercial finance providers to register with the state. Connecticut’s law applies to sales-based financing of $250,000 or less and requires financers to register with the state, whereas Florida’s law applies to a broader range of commercial financing arrangements with a principal amount of $500,000 or less, but does not include a registration obligation. Each law contains some unique and interesting provisions, which we discuss in turn below.
Connecticut SB 1032
Overview and Registration Requirement
Enacted June 28, 2023, Connecticut Senate Bill 1032 applies to sales-based financing transactions of $250,000 or less. The law applies more narrowly than most commercial financing disclosure laws enacted to date by other states in that it applies only to sales-based financing, also known as merchant cash advances, and not to other traditional forms of credit such as closed- or open-end loans or leases.
In addition, covered providers—and brokers—of sales-based financing must register with the Connecticut Department of Banking. The limited scope of the law combined with the registration obligation suggest that the law may have taken inspiration from the similar Virginia law (previous discussed in our Legal Update) enacted in 2022.
Scope of Law
Under the new Connecticut law, a “provider” of sales-based financing is defined as a person that extends a specific offer of financing—thus potentially capturing brokers in addition to funders of financing. The Connecticut law provides a range of familiar exemptions, including for depository institutions and their affiliates, certain technology service providers operating financing platforms, providers of real estate-secured financing, and lessors, among others, as well as a five-transaction de minimis exemption.
When the law takes effect, non-exempt “providers” of sales-based financing will have to disclose the core terms of a financing offer at the time a specific offer of financing is extended—including the amount of financing, the “finance charge” as calculated under the Truth in Lending Act (TILA), repayment schedule, fees, and other details.
Importantly, the Connecticut law authorizes the state’s Department of Banking to grandfather in another state’s disclosure regime, if the Department determines that such other state’s disclosures “meet or exceed” the requirements of SB 1032. This is the first such state reciprocity provision we have seen in the laws passed so far. This option—should the regulator choose to exercise it—could potentially save time and money for a provider that has already worked to comply with one of the other state laws enacted over the past few years.
Potential Penalties and Effective Date
Violations of the Connecticut law are punishable by injunction and civil penalties of up to $100,000 per violation.
The law will take effect July 1, 2024, which will allow covered providers a reasonable period in which to comply, and for the Department of Banking to promulgate any implementing regulations, which the law permits (but does not require) the Department to issue.
Florida HB 1353
Florida House Bill 1353, titled the Florida Commercial Financing Disclosure Law, was enacted June 23, 2023, and applies to a wider range of commercial financing than Connecticut’s law. The reach of the Florida law is similar to most states’ disclosure laws, in that it applies to commercial closed- and open-end loans and accounts receivable purchase transactions in amounts of $500,000 or less.
Unlike the Connecticut law, Florida’s law does not require covered entities to register with the state.
Scope of Law
The Florida law applies to “providers” that “consummate” more than five qualifying transactions per calendar year. A provider includes a nonbank that operates an online platform as part of a bank partnership program. Brokers of commercial financing generally are not expressly subject to the law’s disclosure requirements, but are subject to other regulation discussed below. Standard exemptions are provided for depository institutions and their affiliates, leases and real property-secured transactions, most floorplan financing, and money transmitters licensed in any state, among others.
Providers subject to the Florida law must disclose the essential terms of financing, including total funds provided, dollar cost of financing (not using a TILA-derived metric, unlike in Connecticut’s law), payment schedule, prepayment penalties, and others.
Disclosures must be provided “at or before consummation” of a qualifying commercial transaction. Only one disclosure must be made per accounts receivable purchase facility, and redisclosure is not required in the event that a consummated facility is modified or subject to forbearance.
Regulation of Brokers
Brokers of commercial financing, while not subject to the Florida law’s disclosure requirements, are subject to prohibitions on the collection of an advance fee for brokering services other than bona fide costs, on false or misleading representations, and on advertising without the broker’s address and telephone number.
Potential Penalties and Effective Date
Violations of the Florida law are punishable by fines of $500 per incident, capped at $20,000 for aggregated violations, with increased penalties for continued violations after receiving notice of a violation from the state’s attorney general. The law applies to in-scope commercial financing transactions consummated on or after January 1, 2024.
Florida and Connecticut are the sixth and seventh states, respectively, to enact commercial finance disclosure laws. As the current legislative season winds down, several other states have their own commercial financing disclosure bills still pending, including Illinois, Kansas, and New Jersey. Additional states are likely to introduce their own bills next year as well, as the legislative appetite to enhance regulation of small business financing (disclosures and licensing/registration) remains strong. Furthermore, the Uniform Laws Committee has recently established a Commercial Financing Disclosure Study Committee to study whether it would be beneficial to develop a uniform law for states to adopt. It is possible that if enough state laws proliferate, a federal law with preemptive effect along the lines of TILA will be proposed, but we are not yet at that stage. And recent court decisions and Consumer Financial Protection Bureau determinations have confirmed that these laws are not preempted by TILA itself.