As we progress through the final quarter of 2023, the financial landscape continues to witness transformative shifts, embracing innovative alternative financing methods like invoice factoring. Small and medium-sized enterprises (SMEs) are increasingly drawn to these alternatives, seeking capital without the confines of conventional borrowing. In this dynamic environment, compliance remains a focal point, given the surge in disclosure laws and heightened regulatory oversight. 

State-Specific Compliance Considerations 

California SB 1235 22800-22805  

As of December 9, 2022, California Senate Bill 1235, integrated into Division 9.5 of the California Financial Code (Cal. Fin. Code §§ 22800 to 22805), imposes rigorous disclosure requirements for providers of commercial financing, including invoice factoring. Specifically, the final regulations issued by the California Department of Financial Protection and Innovation (DFPI) mandate that, at the time of extending a commercial financing offer, companies engaged in factoring transactions must deliver comprehensive “cost of credit” disclosures to applicants whose businesses are primarily directed or managed from California. The detailed requirements include column-by-column and row-by-row disclosure formatting. As well as electronic signature provisions, and rules for determining the applicability of statutory exemptions for transactions not exceeding $500,000.  

The disclosed information must cover annual percentage rates (APRs) and category-specific rules for calculating or estimating APRs, finance charges, and itemizations of the amount financed.  

Additionally, obtaining the California Financing Law license via the Nationwide Multistate Licensing System (NMLS) is a prerequisite for individuals or companies engaged in commercial financing. This license serves a dual purpose, granting authorization as a finance lender, broker, or a combination of both. Following approval, the California DFPI typically issues licenses electronically, delivering them to the designated email address of the licensee. 

New York’s Commercial Financing Disclosure Regulations: Factoring Funders Navigate Compliance 

As of August 1, 2023, factoring lenders in New York face heightened compliance obligations under the recently enacted NYCRR 600 / SB5470 regulations. These rules mandate detailed disclosures for commercial financing recipients, specifically, those offered $2.5 million or less. Compliance entails precise adherence to disclosure requirements at the time of extending specific financing offers. Covering crucial aspects such as APR, finance charge rates, and financing amounts. Notable stipulations include exemptions for majority-owned subsidiaries of banks and credit unions. Mandatory disclosures are applicable only if the recipient’s business is primarily directed or managed from New York.

However, there are revised guidelines for broker compensation disclosures. Electronic signature procedures, aligned with the New York Electronic Signatures and Records Act, are now a crucial part of compliance. Factoring funders had to implement robust systems to ensure accurate and timely disclosures to meet the six-month compliance deadline. 

Utah’s SB183 Enacts Disclosure and Registration Requirements for Factoring Funders 

Effective since January 1, 2023, Utah implemented SB183. Unlike California and New York, Utah’s Commercial Financing Registration and Disclosure Act places emphasis on registration rather than an APR disclosure requirement. Commercial lenders in Utah are required to register as commercial loan providers with the Nationwide Multistate Licensing System and Registry (NMLS) and the Utah Department of Financial Institutions (DFI). The Act applies to commercial-purpose transactions of $1 million or less. Which covers commercial loans, commercial open-end credit plans, and accounts receivable purchase transactions. This encompasses typical merchant cash advance or factoring transactions.

Disclosures mandated by the Act include details on the total funding provided and disbursed, the total amount payable to the commercial lender, the total dollar cost of the transaction, payment details, prepayment costs or discounts, any broker payments, and a description of the methodology for calculating variable payment amounts and associated circumstances. Registration renewal is an annual requirement, due annually by December 31 each year. Governor Spencer Cox signed SB183 into law on March 24, 2022. 

Upcoming Disclosure Regulations: Florida & Georgia 

Both Florida CS-HB 1353 and Georgia SB 90, effective January 1, 2024, mandate disclosure for factoring providers engaging in commercial financing transactions. Florida’s Commercial Financing Disclosure Law (CFDL) applies to a broad spectrum of commercial loans, accounts receivable purchase transactions, and open-end credit plans with businesses located in the state. Notably, it lacks an APR disclosure requirement and, unlike some other states, does not incorporate specific Truth in Lending Act (TILA) provisions related to consumer loans. Disclosure requirements cover details like the total funds provided, disbursed, and payable, as well as the dollar cost of the transaction, payment terms, and prepayment information. 

In Georgia, SB 90 defines a provider as an entity completing more than five commercial financing transactions in the state annually, extending to those offering commercial financing products via an online platform under a written agreement with a depository institution. The disclosure requirements for SB 90 include specifics on the total funds provided, disbursed, and paid, as well as the dollar cost of the transaction, payment details, and prepayment considerations. Significantly, both Florida and Georgia lack a requirement for covered entities to register with the state. Florida’s statute, while somewhat less explicit, pertains to transactions “with a business located in this state.”

This suggests applicability to recipients with headquarters in Florida. Yet, potentially encompassing lending to businesses with a presence in the state. It is advisable to consult with legal counsel for guidance on the appropriate course of action. Factoring companies operating in these states should proactively prepare to comply with these regulations. This will ensure a smooth transition and alignment with the evolving legislative landscape. 

CapFlow Direct Line to Compliance Department 

If you have any questions on upcoming or existing disclosure laws, you may reach out to our compliance department. Dan Taylor, our Vice President of Compliance & Data Assurance, provides support and guidance on disclosure regulations so that you are well-prepared for any inquiries regarding pre-existing or upcoming disclosure laws pertaining to commercial financing. We strongly recommend reaching out for assistance and guidance via email at [email protected].