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Enhancing Transparency: Managing Disclosure Requirements in Alternative Financing

Date: Jul 13, 2023 @ 05:00 AM
Filed Under: Regulatory

Disclosure requirements play a pivotal role in the alternative financing industry, compelling funders to disclose specific information to borrowers to ensure merchants can make well-informed decisions.

Overview of Disclosure Requirements

Several states in the U.S. have taken proactive measures to enforce their own registration disclosure requirements, placing a strong emphasis on transparency and safeguarding small business’ interests.

Compliance with these state-specific regulations is imperative for funders  operating in the alternative financing industry, as it demonstrates their commitment to merchant protection and fosters an environment of trust. To maintain compliance, funders and lenders must stay ahead of the evolving regulatory landscape in each state where they conduct business, thereby ensuring they provide accurate and comprehensive disclosures about terms, fees, repayment schedules and potential risks associated with any financing.

By adhering to these disclosure requirements, funders and lenders fulfill their regulatory and legal obligations while bolstering the integrity and credibility of the alternative financing industry, ultimately empowering merchants with the necessary information to make sound financial decisions.

California's Disclosure Law SB 1235 for Transparent Financing

California's disclosure law went into effect on December 9th, 2022. This legislation imposed specific requirements on funders, lenders and brokers, compelling them to furnish detailed information for certain commercial financing transactions. The law's regulations encompass these disclosures’ content, which span accounts receivable purchase transactions, asset-based lending transactions, commercial financing, commercial loans, and commercial open-end credit plans.

To determine whether a transaction is subject to the provisions of this disclosure law, businesses are encouraged to review the details outlined in Senate Bill No. 1235. Notably, California is the first state to mandate that nonbank lenders disclose an estimated annual percentage rate (APR). The APR requirement is not without controversy. There is a lawsuit challenging the reporting of APR as part of California’s Commercial Financing Disclosure Law. The argument being that the disclosure compels companies to inaccurately represent the costs and features of the financing. The law exempts depository institutions, commercial financing transactions secured by real property, and commercial loans under $5,000. Furthermore, funders must obtain the financing recipient's signature on the disclosure before finalizing the transaction.

Financial providers, under the purview of this law, are mandated to prepare written disclosures encompassing crucial terms such as the funding provided, APR, finance charges, total payment amount, and periodic payment amount. Furthermore, written disclosure must be provided to the recipient if there are changes to the terms of an existing contract, particularly if it results in an increase in the APR. Lastly, the law underscores the requirement for financial providers to possess a signed copy of the disclosure before commencing the transaction, ensuring clarity and transparency throughout the process.

Safeguarding Businesses with Virginia's HB1027 Regulations for Revenue-Based Financing

Revenue-based financing has emerged as a favored funding option for businesses in Virginia seeking capital for their operations. To safeguard the interests of these businesses, the State Corporation Commission has introduced regulations that impose obligations on financing providers and brokers.

According to the newly implemented regulations, all providers and brokers engaged in revenue-based financing must register with the State Corporation Commission in accordance with the prescribed procedures. The registration process must have been completed by November 1, 2022, and subsequently on an annual basis. Additionally, financing providers are now obliged to furnish recipients with comprehensive disclosures when extending a specific financing offer. This includes details such as the total financing amount, finance charges, total repayment amount, estimated number of payments, payment amounts, and any applicable fees. Unlike the laws in California and New York, Virginia does not mandate the disclosure of an annual percentage rate (APR) but is based on the total cost of capital. The disclosure obligations became effective on July 1, 2022.

Utah Disclosure Requirements SB183 For Ensuring Clarity in Financing

Following in the footsteps of California and Virginia, Utah joined the ranks by implementing its own set of registration and disclosure requirements for the alternative financing industry. The State has taken a significant step forward by enacting SB183 into law, which mandates that providers undergo formal registration with the Utah Department of Financial Institutions (DFI). In compliance with Utah's disclosure regulations, funders and lenders are obligated to provide borrowers with essential details, and any associated fees or charges. A comprehensive breakdown of the repayment terms must also provided, including the total amount due, the estimated payment schedule, the total funds disbursed, and any penalties applicable to late or missed payments.

Furthermore, Utah's specific regulations extend to brokers. Brokers are required to disclose the commission amounts they receive and provide a clear explanation of the payment method. Additionally, they must outline any potential hypothetical scenarios that could result in term variances or conflicts. By ensuring that merchants have access to transparent and accurate information regarding the terms of their financing, Utah's regulations serve to protect small businesses from potential financial harm and promote responsible borrowing practices. These measures are instrumental in fostering a healthy and well-regulated alternative financing industry.

In terms of compliance timelines, Utah's regulations went into effect on January 1, 2023. This requirement applies to deals that meet the criteria of a commercial loan, accounts receivable purchases, factoring, and merchant cash advances for amounts up to $1 million. Additionally, financing providers must be registered with the Nationwide Multistate Licensing System and Registry (NMLS) to ensure comprehensive compliance with Utah's registration and disclosure regulations.

Enhancing Borrower Confidence with New York's Upcoming Commercial Finance Disclosure Law

The state of New York enacted the Commercial Finance Disclosure Law in 2020, which imposes requirements on funders to provide written disclosures akin to the Truth in Lending Act for specific commercial financing offers. To operationalize the law, the NY Department of Financial Services was tasked with developing a regulation, which was officially adopted by the regulatory body on February 1, 2023, following an extensive review and rulemaking process. The regulation will go into effect on August 1, 2023, necessitating compliance by applicable  providers. It is advisable for these providers to commence preparations for compliance as early as possible, considering the intricacies outlined in the New York regulation.

Under the New York Commercial Finance Disclosure Law (CFDL), certain providers offering commercial financing up to $2,500,000 are required to furnish standardized disclosures to potential borrowers when extending financing offerings. The final rules provide comprehensive guidance on complying with the law, including specific formatting requirements for financial disclosures and the parties to whom they apply. Funders are obligated to provide merchants seeking capital with detailed information, such as the total amount financed, total repayment amount, annual percentage rate (APR), and collateral requirements or security interests (if any).
Moreover, the regulations establish category-specific guidelines for calculating the finance charge and estimated APR, advising funders to exclude fees and charges. Providers must obtain the recipient's signature on the disclosure in order to proceed with the application process, and the regulations further elucidate the signature requirements, including those pertaining to electronic signatures.

Questions on State-Specific Regulations

For any inquiries or potential issues pertaining to compliance with the aforementioned State regulations, please do not hesitate to reach out directly via email to We will be pleased to address any questions or concerns you may have regarding regulatory compliance.

Dan Taylor
Vice President of Compliance and Data Assurance
Dan Taylor is the Vice President of Compliance and Data Assurance at CFG Merchant Solutions, a financial services company that provides working capital to small and mid-sized businesses in the United States. Taylor's expertise in compliance, data assurance, and privacy has been instrumental in ensuring that CFGMS operates with transparency and integrity, while adhering to all required regulations. His leadership has helped the company maintain its reputation as a trusted provider of working capital to businesses across the United States.
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