Last month, the Texas legislature introduced two companion bills, S.B. No. 2677 and H.B. No. 700, to regulate sales-based commercial financing. For purposes of the proposed legislation, sales-based financing is a transaction that is repaid as a percentage of sales or revenue, or according to a fixed payment mechanism that provides for a reconciliation process to adjust payments to an amount that is a percentage of sales or revenue. These bills propose significant changes to the regulatory landscape for sales-based financing transactions, including the imposition of a usury cap on such transactions and disclosure requirements that only extend to financing of over $500,000. The bills are currently pending before committees.
Key Provisions of the Bills
The proposed legislation aims to introduce a new chapter, Chapter 398, to Title 5 of the Texas Finance Code, which will govern commercial sales-based financing transactions. The key provisions of the bills include:
- Definitions and Scope: The bills define “commercial sales-based financing” as an extension of sales-based financing to a recipient who does not intend to use the proceeds for personal, family, or household purposes. A commercial sales-based financing “broker” means a person, other than a financer, who for compensation offers commercial sales-based financing or offers to obtain such financing from a provider.
- Exemptions: Certain entities are exempt from the provisions of the new chapter, including banks, credit unions, and their subsidiaries or affiliates, as well as lenders regulated under the Farm Credit Act of 1971. Additionally, transactions secured by real property, leases, purchase-money obligations, and certain high-value transactions are exempt.
- However, technology service providers to an exempt entity such as a bank are not exempt if they purchase any interest in the transactions extended under the program.
- Application of Usury Law: Fees and charges paid or charged under a sales-based financing transaction are considered interest for usury purposes, regardless of the principal amount of the advance.
- Disclosure Requirements: If a provider extends a specific offer of commercial sales-based financing of more than $500,000 to a recipient in Texas, the provider must disclose specific information to recipients, including the total amount of financing, disbursement amount, finance charge, total repayment amount, estimated repayment period, payment amounts, and any additional fees. Providers must obtain the recipient’s signature on these disclosures before finalizing an application.
- Broker Registration: Individuals or entities acting as commercial sales-based financing brokers must register with the Texas Department of Banking. The registration process includes submitting a completed registration form and paying the required fees. Brokers must renew their registration annually and update their registration information as necessary.
- Enforcement and Penalties: Violations of the new chapter are subject to civil penalties of up to $10,000 per violation, with a maximum aggregate penalty of $100,000. Violations are also considered deceptive trade practices under the Texas Business & Commerce Code, but the legislation does not create a private right of action based on compliance or noncompliance.
If passed, the legislation will take effect September 1, 2025. Brokers would need to register with the Texas Department of Banking no later than January 1, 2026.