/>iOn June 20, Texas Governor Greg Abbot signed into law HB 700, adding Chapter 398 to the Texas Finance Code. Effective September 1, the statute establishes a regulatory framework for commercial sales-based financing and imposes specific compliance obligations on providers offering such products to Texas borrowers.
HB 700 requires providers or brokers of commercial sales-based financing transactions, including merchant cash advances products, to register with the state and provide Texas borrowers certain disclosures. Key provisions of the bill include:
- Comprehensive disclosures. For commercial sales-based financing transactions of less than $1 million, a provider must deliver a written disclosure and obtain the recipient’s signature. The disclosure must include: (1) the total financing amount; (2) the disbursement amount; (3) the total repayment amount; (4) payment schedule and estimated monthly payments; (5) all finance charges and fees; (6) any collateral or security requirements; and (7) broker compensation. If the transaction requires paying off an existing balance, the provider must also disclose: the amount of the new financing applied to prepayment charges or unpaid finance charges, and the dollar reduction to the disbursement amount.
- Registration requirements. The law requires providers and brokers of sales-based financing to register with the Texas Office of Consumer Credit Commissioner.
- First-priority lien prerequisite. A provider may set up ACH debits only after perfecting a first-position priority interest senior to every other claimant to the account.
- Confession-of-judgment ban. Any confession of judgment provision or any similar provision is void and unenforceable.
- Broad product coverage. The restriction applies to purchase-of-receivables transactions and revenue-based loans whose payments fluctuate with sales.
- Exemptions. The law exempts banks, bank holding companies, credit unions, and any of their affiliates; certain technology service providers that have no interest in the transaction; real property transactions, leases, transactions more than $50,000 made to an automobile dealer, and manufacturers and captive finance companies.
- UDAAP prohibition. The law requires the Finance Commission of Texas to adopt rules that identify unfair, deceptive, or abusive acts or practices related to transactions that are subject to the law. This echoes recent developments in other states such as California which enacted UDAAP prohibitions.
While the disclosure requirements take effect by September 1, 2025, the law’s registration requirements are effective as of December 31, 2026. Notably the law’s registration requirements is not limited to companies that engage in sales-based financing in an amount less than $1 million. Accordingly, a company that provides or brokers sales-based financing transactions of $1 million or more could be required to register, despite not needing to provide disclosures.
The law’s first-priority lien prerequisite is a big departure from traditional commercial loan financing regimes. Many merchants receiving sales-based financing have existing financing arrangements that are secured by an “all assets” lien and many sales-based financing transactions will be unable to take a first-lien security interest in a recipient’s deposit account.
Finally, while containing many of the traditional exemptions, the law fails to include a de minimis exemption that other commercial financial disclosure laws have (e.g., no disclosure for companies that make or broker five or fewer transactions in a single year).
Putting It Into Practice: Texas joins a growing number of states regulating commercial financing transactions (previously discussed here, here, and here). With multiple states implementing registration, disclosure, and lien-priority requirements onto commercial financing, nationwide financing providers should be prepared to update disclosure forms and contract terms accordingly.
