Following the lead of California and New York, Utah and Virginia have passed disclosure requirements for commercial lending transactions, including merchant cash advances. While the New York and California requirements have not yet taken effect due to regulatory delays, more states are moving toward regulating revenue-based financing providers.
Utah’s New Disclosure Requirements For Commercial Lending Transactions
On March 24, 2022, Utah Governor Spencer Cox signed the Commercial Financing Registration and Disclosure Act (CFRDA) into law. The CFRDA applies to all commercial financing providers, including merchant cash advance providers, online small-to-medium-sized (SMB) lending platforms, commercial litigation funders, and other non-bank small business lenders.
Certain entities and transactions are exempt, however, including:
- Depository institutions, their subsidiaries, and other entities regulated by a federal banking agency
- Licensed money transmitters
- Commercial financing transactions of more than $1 million
- Commercial mortgages
- Purchase money obligations
- Commercial loans and open-end credit plans of $50,000 or more to motor vehicle dealers or rental companies
Unlike the New York and California laws, the CFRDA does not require an APR disclosure. However, covered commercial lenders must make the following disclosures:
- The total amount of funds provided
- The total amount of funds disbursed – if less than the amount provided
- The total amount to be repaid
- The total dollar cost of the transaction
- The frequency and amount of each payment
- Whether prepayment penalties apply
- Whether any portion of the financing was paid to a broker as a commission
The disclosure requirements apply to a commercial financing transaction consummated after January 1, 2023.
Virginia’s New Commercial Financing Disclosure
On March 7, 2022, the Virginia state legislature passed HB1027, a law designed to protect small businesses from merchant cash advances. The new law requires both sales-based providers and brokers to register with the commissioner of financial institutions by November 1, 2022. In addition, providers and brokers must:
- Be authorized to do business in the state
- Pay an initial registration fee of $1,000
- Pay an annual renewal fee of $500
Whether individual employees of providers and brokers will also be required to register is unclear at this time. The new law also imposes disclosure requirements when a specific offer for a merchant cash advance is made to a business, including:
- The total amount of the financing and the actual disbursement amount after any fees are deducted
- The finance charge (e.g. factor rate)
- A description of all other fees and charges
- The total repayment amount
- The estimated number of payments, based on projected sales volume
- The payment amounts, based on the projected sales volume
- Prepayment penalties, if any
- A description of collateral requirements, if any (e.g. personal guarantee, confession of judgment)
Virginia’s new disclosure law applies to revenue-based financing contracts entered into on or after July 1, 2022.
Why This Matters
Merchant cash advances provide funds to businesses that lack access to traditional sources of financing, such as bank loans and lines of credit. However, these alternative funding products are high risk because they contain onerous provisions like personal guarantees and confessions of judgment. In the event of default, the funder can seize both the business assets and the owner’s personal assets.
Because merchant cash advances are not loans, they are generally not regulated by federal lending laws, but states are starting to rein in the excesses of MCA providers. Whether tougher disclosure requirements will protect small business owners remains to be seen. In the meantime, if your business is struggling under the terms of an MCA agreement, talk to an experienced debt relief specialist.