Texas Commercial Financing Disclosure and Registration Law Threatens Sales-Based Financing Industry

Texas has enacted a law that has the potential to place substantial impediments on sales-based financing providers, including merchant cash advance companies, seeking to operate in Texas. The new Texas law prohibits sales-based financing providers and brokers from establishing a mechanism to automatically debit a recipient’s deposit account to recoup receivables unless the provider or broker holds a perfected first-lien security interest in this account—which very few sales-based financing programs are designed to do. In addition, the law specifically excludes sales-based financing transactions from being able to benefit from Texas’s unique exemption from its usury law that applies to “account purchase transactions.” Both provisions have the potential to significantly restrict or impair many sales-based financing programs from offering financing to Texas businesses.

The new law will also require providers and brokers of commercial financing to make disclosures to recipients, becoming the tenth state to enact a commercial finance disclosure law since 2018. Like some but not all of the other nine states’ commercial finance laws, Texas House Bill 700—which was signed into law by the state’s governor on June 20—also requires providers and brokers of “sales-based financing” to register with the state.

Below we discuss how the Texas legislature has addressed the application of state usury limits to the sales-based financing transactions that are subject to the new law (the “Act”), as well as details on the Act’s registration requirement; the timing and content of required disclosures; new UDAAP prohibitions; restrictions on automatic debits for payments; exemptions from the Act; the law’s effective date and how the law will be administered and enforced.

Registration

The Act requires providers and brokers of sales-based financing to register with the Texas Office of Consumer Credit Commissioner (OCCC). The Texas law defines sales-based financing as:

a transaction that is repaid by the recipient to the provider of the financing:
(A) as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient; or
(B) according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.

The Act’s registration requirement makes it the first Texas law to license commercial-purpose finance activities. Notably, unlike the Act’s disclosure requirements, the registration obligation is not limited to persons that transact sales-based financing in an amount less than $1 million. Thus, a company that solely provides or brokers sales-based financing transactions of $1 million or more could be required to register, but not to provide disclosures, unless another exemption applies.

The registration form must include the company’s name; any DBA name; principal office address; designated agent contact information; and any judgment, memorandum of understanding, cease and desist order, or conviction related to a violation of law, act of fraud, breach of trust, or money laundering against the company or its directors, officers or controlling persons. The Act directs the OCCC to set the registration fee and adopt a registration form by rule.

Registrations must be renewed annually on or before January 31. If the information submitted on a registration form changes, the registration must be updated within 90 days.

Disclosure Requirements

The Act’s disclosure requirements are somewhat similar to the sales-based financing disclosure laws enacted in Connecticut and Virginia in recent years. At a high level, the Texas law requires a provider extending a specific offer of sales-based financing in an amount of less than $1 million to disclose the following information to the recipient:

• the total amount of the financing;
• the disbursement amount;
• the finance charge;
• the total repayment amount;
• the estimated period for the periodic payments to equal the total repayment amount under the terms of the financing;
• the payment amounts, whether payments are fixed or variable;
• a description of all other potential fees and charges not included in the finance charge, including draw fees, late payment fees, and returned payment fees;
• any finance charge the recipient is required to pay if the recipient pays off or refinances before the transaction is scheduled to be repaid in full;
• any additional fees, not included in the finance charge, the recipient will be required to pay upon prepayment;
• a description of any collateral requirements or security interests; and
• a statement outlining whether the provider will pay compensation directly to a commercial sales-based financing broker and the amount of such compensation.

Additional information must be disclosed if the provider requires the recipient to pay off an existing sales-based financing as a condition of obtaining new financing. The disclosures must be signed by the recipient before the application for sales-based financing is finalized.

Although the Act authorizes administrative rulemaking to implement the UDAAP and registration provisions, it does not specifically direct regulators to adopt a template disclosure form. As such, industry participants may be responsible for designing their own disclosures.

Restrictions on Automatic Debits

It is relatively common for sales-based financing providers to recoup their purchased receivables through preauthorized electronic debits from one or more of the recipient’s operating accounts. One of the most notable features of the Act is its prohibition on providers or brokers of sales-based financing from establishing a mechanism to automatically debit a recipient’s deposit account unless the provider or broker holds a perfected security interest in such account with first-lien priority. Since many merchants or companies receiving sales-based financing may have existing financing arrangements that are secured by an “all assets” lien, it is unlikely that a significant number of sales-based financing transactions would be able to take a first-lien security interest in a recipient’s deposit account. The Act does not expressly prohibit (i) “split pay” structures, where a sales-based financing provider receives its receivables directly from a payment processor or credit card processor; (ii) arrangements where receivables are recouped prior to the amounts ever reaching a recipient’s deposit account(s), or (iii) receivables that are transmitted by a recipient through a recipient-initiated electronic transfer.

Removal of Usury Exemption

In a unique and somewhat unprecedented move, the Act goes beyond registration and disclosure requirements to also regulate substantive transaction terms and practices of sales-based financing agreements. Texas has a unique provision in its Finance Code which provides that the parties to an “account purchase transaction,” which is defined as an agreement under which a person engaged in a commercial enterprise sells accounts, instruments, documents, or chattel paper subject to this subtitle at a discount, (regardless of whether the person has a repurchase obligation related to the transaction), may agree to characterize their transaction as a purchase and sale and, if they do, then there is a conclusive presumption that the transaction is not a loan. The Texas Finance Code also provides that the amount of the discount at which a provider purchases accounts is not interest for purposes of Texas’s usury law. Over the years, courts interpreted the “account purchase transaction” provisions to apply not only to traditional factoring transactions, but also to merchant cash advances and sales-based financing products. This led to Texas being viewed as a jurisdiction that had relatively beneficial regulatory treatment of sales-based financing.

In an unusual provision, the Act specifies that a sales-based financing transaction does not qualify as an “account purchase transaction.” While the Act stops short of declaring sales-based financing to be a per se loan or credit transaction, sales-based financing transactions will no longer benefit from the conclusive presumption that they are not loans, and that the discount charged under a sales-based financing transaction is not interest. The Act does not amend the general definition of a “loan” in the Texas Finance Code, which is “an advance of money that is made to or on behalf of an obligor, the principal amount of which the obligor has an obligation to pay the creditor.”

The Act also prohibits the Finance Commission of Texas from adopting a maximum APR, finance charge, or fee for sales-based financing transactions. It remains to be seen whether the regulator will interpret this provision—and the exclusion of sales-based financing from characterization as an “account purchase transaction”—to mean that sales-based financing transactions are subject to Texas’ usury law and its 18% annual interest rate limit.

UDAAP Prohibitions

The Act authorizes the OCCC to bring enforcement actions for violations of the Act, and requires a different regulator—the Finance Commission of Texas—to adopt rules that identify unfair, deceptive, or abusive acts or practices (known as “UDAAP” in the federal context) related to transactions that are subject to the Act. Texas’s application of UDAAP principles to small business financing echoes recent developments in other states. For example, California subjected certain providers of commercial financial products or services to UDAAP prohibitions in a 2023 rulemaking, and legislation is pending in New York that would enact UDAAP protections for small businesses.

Exemptions

The Act provides some, but not all, of the exemptions we have come to expect from state commercial finance disclosure laws. Notably absent is a de minimis exemption (e.g., for a company that makes or brokers five or fewer transactions in a single year). The Act exempts:

• a bank, out-of-state bank, bank holding company, credit union, federal credit union, out-of-state credit union, or any subsidiary or affiliate of those financial institutions;
• a person acting in the capacity of a technology services provider to an exempt entity if the person has no interest, arrangement, or agreement to purchase any interest in program transactions;
• transactions secured by real property;
• leases (as defined under the Texas Uniform Commercial Code);
• transactions of $50,000 or more made to a motor vehicle dealer, motor vehicle rental company or affiliate of a motor vehicle rental company;
• manufacturers and captive finance companies; and
• lenders regulated under the Farm Credit Act of 1971.

Effective Date, Administration and Enforcement

Non-exempt providers and brokers of sales-based financing must register with the OCCC by December 31, 2026. The remaining requirements of the Act—including the disclosure requirement and prohibition on automatic debits—take effect much sooner, on September 1, 2025, although it is possible that Texas may decide to follow the example of other states and provide a “grace period” to allow sales-based financing providers and brokers to come into compliance with the law and develop compliant disclosures. Providers and brokers of sales-based financing should not rely on this possibility, however.

With fully 20% of the states now having enacted some variety of commercial finance disclosure law—and no significant movement to impose uniform disclosure requirements at the federal level—providers and brokers of commercial financing will have to continue navigating a growing patchwork of state regulatory regimes, now including Texas, for the foreseeable future.