Texas Governor Signs Commercial Sales-Based Financing Legislation Into Law

Highlights

• Texas Gov. Greg Abbott signed House Bill 700 into law on June 20, 2025, despite significant opposition from industry with respect to one critical legislative provision.
• This legislation – which amends Title 5 of the Texas Finance Code – primarily relates to disclosures for certain commercial sales-based financing transactions and registration of commercial sales-based financing brokers and providers, and it becomes effective on Sept. 1, 2025.
• As detailed further below, this legislation may pose significant challenges for purchase transactions, including merchant cash advances or revenue-based finance loans, and potentially deprives many of the state's small and medium-sized businesses of access to working capital

Texas Gov. Greg Abbott signed House Bill (HB) 700 into law on June 20, 2025, despite significant opposition from industry with respect to one critical legislative provision. This follows the legislation's approval by the Texas Legislature at the end of May 2025, and follows similar legislation in other states. This legislation – which amends Title 5 of the Texas Finance Code – primarily relates to disclosures for certain commercial sales-based financing transactions and registration of commercial sales-based financing brokers and providers, and it becomes effective on Sept. 1, 2025. As detailed further below, this legislation may pose significant challenges for purchase transactions, including merchant cash advances (MCAs) or revenue-based finance loans, and potentially deprives many of the state's small and medium-sized businesses of access to working capital.

Scope

The legislation applies to a provider or commercial sales-based financing broker who offers, obtains or provides commercial sales-based financing services over the internet to or for a Texas recipient, regardless of whether the provider or broker maintains a physical presence in Texas.

Definitions

The legislation includes the following definitions:

• "Commercial sales-based financing" or "commercial sales-based financing transaction" means "an extension of sales-based financing to a recipient by a provider, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes."
• "Commercial sales-based financing broker" means "a person who, for compensation or the expectation of compensation, obtains commercial sales-based financing for a recipient or offers to obtain commercial sales-based financing for a recipient from a provider."
• "Provider" means "a person who provides or will provide commercial sales-based financing to a recipient or who extends a specific offer of commercial sales-based financing to a person applying for that financing or the person's authorized representative."
• "Sales-based financing" means "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."
• "Specific offer" means "the specific terms of commercial sales-based financing. The term includes a price or amount quoted to a recipient by a person providing the financing based on information obtained from or about the recipient that, if accepted by the recipient, would be binding on the provider, subject to specific requirements in the financing terms."

Exemptions

The legislation includes a number of important exemptions, including for:

1. banks, out-of-state banks, bank holding companies, credit unions, federal credit unions, out-of-state credit unions or any subsidiary or affiliate of such financial institutions
2. persons acting as technology services providers to exempt entities (so long as such persons have "no interest, arrangement, or agreement to purchase any interest in the commercial sales-based financing extended in connection with the program")
3. lenders regulated under the Farm Credit Act of 1971
4. certain persons who extend or broker commercial sales-based financing transactions entered into under a commercial sales-based financing agreement or commercial open-end credit plan of $50,000 or more

Administration and Rulemaking

Though this legislation generally charges the Texas Office of Consumer Credit Commissioner with administration, implementation and enforcement, the Finance Commission of Texas is tasked with rulemaking responsibilities applicable to providers and commercial sales-based financing brokers with respect to "unlawful, unfair, deceptive, or abusive acts or practices related to a transaction" within scope. However, the Finance Commission of Texas is prohibited from adopting a maximum annual percentage rate (APR), finance charge or fee for commercial sales-based financing transactions.

Regulation and Disclosure Requirements

The legislation imposes certain disclosure requirements for providers who extend specific offers of commercial sales-based financing of less than $1 million to Texas recipients, including the total amount of the financing, disbursement amount, finance charge, total repayment amount, payment amounts, a description of all other potential fees and charges, and a description of collateral requirements or security interests, if applicable. The provider is required to obtain the recipient's signature on these required disclosures before finalizing an application for a commercial sales-based financing transaction.

Provider and Broker Registration

Persons are not permitted to engage in business as a provider or commercial sales-based financing broker for compensation in Texas without being registered with the Texas Office of Consumer Credit Commissioner. Persons engaging in business as a commercial sales-based financing broker or provider as of the contemplated Sept. 1, 2025, effective date of this legislation will be required to register by Dec. 31, 2026.

Unenforceability of Certain Contract Provisions

Commercial sales-based financing contracts that contain a confession of judgment provision or any similar provision are deemed void and unenforceable under the legislation.

Prohibition of Certain Automatic Debits

The legislation prohibits a provider or commercial sales-based financing broker from establishing a mechanism for automatically debiting a recipient's deposit account unless the provider or broker holds "a validly perfected security interest in the recipient's account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons."

Enforcement

A person who violates this legislation is subject to a civil penalty of $10,000 for each violation, but there is no private right of action against any person based on compliance or noncompliance.

Takeaways

Primarily, industry's concern with this new law is the requirement that automatic debits on the underlying businesses' accounts be utilized only by a revenue-based financing (RBF) provider that is in a first-lien position on the underlying business, which was an amendment added to the legislation by Sen. Charles Perry (R-Lubbock) on the Senate floor. In his comments, Sen. Perry noted that the purpose of his amendment was to ensure that RBF companies "are known" to other financing providers. The Texas Senate passed the legislation as amended on May 26, 2025, and the Texas House concurred in the Senate-amended version on May 28, 2025. This provision requires RBF providers to obtain a validly perfected, first-priority security interest in a recipient's account in order to ACH debit a Texas business' bank account and largely prohibits a Texas business from choosing to have payments to RBF providers automatically debited from its business bank account.

The consensus view appears to be that this provision will serve as a de facto ban on RBF transactions (including MCAs) in Texas for multiple reasons, absent significant modifications to the structure and repayment terms and conditions of these transactions. These reasons include the following:

• The standard industry practice is for lenders to issue blanket liens across "all assets," which means that many small businesses do not have invoices to factor or collateral to pledge for a loan but still have prior liens on their accounts.
• There are numerous stale Uniform Commercial Code (UCC)-1 filings on Texas small businesses because there is no legal obligation to remove a lien once the debt is paid in full.
• RBF providers could inadvertently trigger penalties under this law because UCC searches do not always catch filings.
• The IRS, along with state and local tax authorities, could have a first priority lien without filing a UCC-1.
• Most businesses (like most consumers) need access to multiple types of financing.

Notably, the scope and coverage of the law are not contingent on whether the provider conducting the debiting is located out of state. Rather, the trigger is simply if the merchant is located in Texas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.