Merchant cash advance lawyer sitting with client

New Disclosure Obligations for Commercial Lenders Now in Effect in California

California’s new commercial financing disclosure regulations became effective on December 9, 2022. The new rules, proposed by the Department of Financial Protection and Innovation (DFPI), extend consumer-like protections to small businesses seeking commercial financing. Let’s look at the new disclosure requirements and how they impact merchant cash advance (MCA) providers. 

Commercial Transactions Impacted By California’s New Disclosure Requirements

The DFPI regulations implement the financing disclosure requirements enacted in September 2018. The final regulations are posted on the DFPI website here. The disclosure requirement will help small business owners better understand the financing terms offered to them. The disclosure requirements apply to providers of commercial financing equal to or less than $500,000. 

The new rule covers the following transactions:

  • Factoring transactions
  • Commercial loans
  • Commercial open-end credit plans
  • Lease financing transactions
  • Asset-based lending transactions
  • Merchant cash advances
  • Online business lending platforms

Merchant cash advances are not considered loans but rather the purchase of future receivables in exchange for upfront cash. Because this alternative funding product is not a demand for payment, it is not a loan and, therefore, not regulated by California. But the new disclosure requirements are a sign that the times they are changing.

What Disclosures Are Required?

In general, providers of commercial financing, including MCA providers, must disclose the following information:

  • The total amount of funds provided
  • The total dollar cost of the financing
  • The term or estimated term
  • The method, frequency, and amount of payments
  • Prepayment penalties
  • The total cost of the financing or annual percentage rate (APR)

Notably, the cost of funding for merchant cash advances is known as a factor rate. This is not a percentage, like an interest rate, but expressed as a decimal figure, ranging from 1.2 to 1.5. When converting a factor rate into an APR, that figure can rise into the triple digits. So the new disclosure requirement will alert businesses taking merchant cash advances to the high cost of funding and may prompt them to consider other options. Financiers subject to the DFPI regulations must ensure that disclosures comply with the new regulation. 

Why This Matters

Small businesses in California that need quick access to working capital often turn to merchant cash advances. Approvals are much faster than traditional business loans, little documentation is required, and credit ratings are not determinative in the approval process. MCA providers were not required to make disclosures, including the cost of funding, until now. 

What effect new disclosure requirements will have on the MCA market remains to be seen. Meanwhile, if you are considering a merchant cash advance or at risk of defaulting on an MCA agreement, contact ReconcileMyMCA.com. Our experienced debt relief specialists will work with the MCA provider to reconcile your merchant cash advance and restructure the payment plan. Contact us today by completing the convenient intake form.