American Factoring Association Year in Review and a Look Forward to 2024

Melissa Donald of LDI Growth Partners LLC provides a rundown of the American Factoring Association’s activity in 2023 and its plans and goals for 2024, including building coalitions at the local, state and federal level to create standard disclosure framework.

By Melissa Donald, President, LDI Growth Partners LLC

What a year 2023 has been for the factoring industry.

We began the year with a first. Even though the fight to defeat California’s SB1235 began in 2018, we started 2023 with the daunting task of implementing our first disclosure regulation. While it became effective in December 2022, the implementation of and compliance with the requirements under SB1235 in California became a large focus of “what now” for the American Factoring Association, the International Factoring Association and all factors across the U.S.

What became clear, as factoring attorneys across the country were providing their interpretation of the regulation and best legal advice they could, is that there is no uniform way for factors to comply. In the short term, many factors have stopped taking on new clients in California while factors in California do not have the bandwidth to fill in the capital vacuum that is left.

The ultimate effect of SB1235 on the business community in California has not been truly realized.  What cannot be argued, however, is that there is less working capital available to the California business community, which is going to have a catastrophic effect in the long term.

Since the enactment of SB1235, many other states have introduced similar disclosure legislation. The AFA took the lessons learned with SB1235 and started a slightly different approach to these new regulations. While still working at the highest levels, we also took the fight “to the streets” and worked to educate legislators about factoring from the top down and from the bottom up.

The results of these efforts were some wins and some tolerable losses.  While there are more states that have disclosure laws in place or expect to enact them soon, several do not have APR requirements and at least two apply only to sales-based lending, such as merchant cash advances.

Where these grassroots efforts really paid off is in Texas. As soon as disclosure legislation was introduced, the factoring community in Texas took action, with factors reaching out to their networks and working their contacts until they were able to talk directly with the bill’s author and other key committee members in the state legislature. Ultimately, the bill died in committee.

The Texas success is the blueprint for how we, as an industry, can move forward.

Federal Disclosure

What also became clear as more states introduced disclosure legislation is that we, as an industry, need to take an even more proactive stance in ensuring that there are some standards and “guardrails” around disclosure. It is unacceptable that we could end up with 50 different sets of rules for how we operate across the country that are challenging, if not impossible, for factors to comply with.

The Executive Board of the AFA voted to devote the time necessary to create a federal disclosure recommendation with the idea that one of our congressional allies could champion it for us.

After a long process, the Capital Access for Small Businesses Harmonization Act (CASH Act) was brought before the AFA board for a vote and was approved. The CASH Act is geared to establish standard disclosure terms and definitions specific for factoring transactions and would preempt state disclosure laws and regulations. 

Parallel Tracks

In tandem with the creation of the CASH Act, the Uniform Law Commission has formed a committee that is also looking into the feasibility of standardization of disclosure requirements across states (similar to the Uniform Commercial Code).  At the time of this writing, there are no updates on the work of the committee.

1071 Dodd Frank

Section 1071 of the Dodd Frank Act requires financial institutions to report data about race, ethnicity, and gender of small business loan recipients to the Consumer Financial Protection Bureau. Over the course of more than three years, the AFA worked tirelessly to build a good working relationship with the CFPB and in the CFPB’s final rulemaking implementing Section 1071, factors were excluded from the data collection and reporting requirements. This is critically important going forward for the factoring industry and is something tangible to build on, as it represents a clear delineation between lenders/MCA companies and factors.

A Look Ahead to 2024

At the state level, using Texas as the blueprint for how to combat disclosure legislation is one of the AFA’s primary goals for 2024. We expect that in the states where disclosure legislation was defeated in 2023, such legislation will likely be reintroduced in some fashion in 2024 or 2025. We also expect other states to introduce disclosure legislation for the first time. It is critical that we are ready. The way to do that is to build coalitions of factors in each state. According to the IFA, more than 40% of its membership is comprised of entrepreneurial factors. We know the local Boards of Supervisors, Chamber of Commerce CEOs, local legislative aids and local state legislators. We are uniquely qualified to take our concerns to them and teach local business leaders about the challenges we are facing and the detrimental effect new regulations will have on local communities. The AFA is generating specific talking points for members to use, and the most powerful tool we have is our own stories.  Truth: We all spend a lot of time teaching our prospective clients about factoring. This is no different.  It has become clear in our meetings that most legislators do not understand factoring or its critical importance to small businesses. We must make an effort to educate them.

At the federal level, the next step with the CASH Act is to work to build consensus with other small business trade associations that might want to join with us in our efforts. Once we have built the coalition, we will work with our congressional allies to have the legislation introduced. The AFA’s goal is for the CASH Act to be introduced as legislation in 2024.

How to Reach Our Goals

Coalition. The primary goal of the AFA going into 2024 is to build coalitions. At the state level, this means a coalition of factors that can work at the local level to educate and make what we do for our clients real and meaningful. At the federal level, this means building a coalition of small business and finance trade associations that want to come together with the common goal of creating a federal disclosure framework with the CASH Act so we can continue to help businesses build, grow and flourish.

First Step

The first step you can take is to get involved. Once you decide to get involved, it is just a matter of how to do it. The AFA needs help at every level, so once you decide to get involved, join the AFA. The minimum donation to join is just $250 annually. There is also a table of “recommended” donations on the AFA website that is based on your portfolio. Once you are a member, let us know how you want to be involved. There is much work to be done and as the old adage goes, many hands make for light work. The more people who participate in the process, the faster we will get to the solution.

To learn more about how the AFA is strategically addressing disclosure laws at the state and federal level, check out the recording of the association’s latest webinar.