Protecting Factoring Transactions in Texas: A Call to Action
Written by: Jason Medley, Esq and Cole Harmonson
The factoring industry is a critical lifeline for small and mid-sized businesses, offering essential financial solutions that provide immediate liquidity through the purchase of accounts receivable. However, this industry, which has played a pivotal role in the economic growth of Texas and beyond, is facing legislative challenges that could hinder its ability to operate effectively.
In the last Texas state legislative session, a bill (S.B. 1918/H.B. 4359) was introduced that sought to impose new disclosure requirements on factoring transactions. While transparency in financial transactions is generally positive, the proposed bill raised significant concerns within the factoring community. It is understood that the bill was introduced at the behest of the merchant cash advance (MCA) industry.
The precise motivations of the MCA industry remain speculative. However, there is a belief within the factoring community that the bill’s language was crafted to position MCAs as factoring transactions under Texas law. If successful, this reclassification would allow MCAs to benefit from specific statutory provisions that exempt factoring transactions from Texas usury limits.
Distinctions Between Factoring and MCAs
Understanding the implications of this proposed legislation requires recognizing the fundamental differences between factoring and MCAs. Factoring is a financial transaction where a business sells its receivables—actual, verified invoices—to a factor at a discount. This provides the business with immediate cash flow, and the factor assumes the credit risk of the account debtor.
In contrast, MCAs involve advances against future receivables, which may or may not materialize. These transactions often feature high costs and rigid repayment schedules tied to a percentage of daily sales, regardless of the business’s actual revenue. Critics argue that these characteristics make MCAs more akin to loans, with repayment terms that can create significant financial strain on borrowers.
The proposed Texas legislation sought to impose disclosure requirements that would have been challenging for factors to meet, given the nature of their transactions. For example, factors often operate with flexibility tailored to the unique needs of each client, making rigid, one-size-fits-all disclosure mandates impractical.
The Industry’s Response
The introduction of this bill was a wake-up call for the factoring industry. Recognizing the potential consequences, the American Factoring Association (AFA), in collaboration with the Texas Chapter of the International Factoring Association (IFA), mobilized to oppose the legislation.
These organizations undertook significant efforts to educate lawmakers about the vital role factoring plays in supporting small businesses. They emphasized that factoring is not merely a financial service but a partnership that enables businesses to maintain steady cash flow, manage growth, and navigate challenging economic periods.
By clarifying the differences between factoring and MCAs, the AFA and the IFA’s Texas Chapter were able to demonstrate that the proposed disclosure requirements were not only unnecessary but also harmful. The bill was ultimately defeated, preserving the integrity of the factoring industry in Texas.
Preparing for the 2025 Legislative Session
Despite this victory, the battle is far from over. The AFA has learned that the MCA industry is preparing to reintroduce similar legislation in the 2025 Texas state legislative session, with a renewed and stronger push for its passage. The proposed bill is expected to include the creation of a new chapter in the Texas Business & Commerce Code to redefine account purchase transactions. This move is unnecessary, as Texas law already provides clear definitions under UCC 9.109(e) and Texas Finance Code Section 306.001(1).
The factoring industry anticipates that the MCA-backed legislation will again attempt to conflate MCAs with factoring transactions. This could lead to MCAs gaining access to protections meant exclusively for factoring, while imposing undue regulatory burdens on factors.
The implications of such legislation extend beyond Texas. In states like California and New York, similar disclosure laws have already been enacted. These laws introduced complexities that financial providers struggled to navigate, ultimately reducing access to capital for small businesses. If the proposed Texas legislation succeeds, it could set a precedent, paving the way for a patchwork of inconsistent regulations across the country.
Safeguarding Factoring and Small Businesses
The AFA remains steadfast in its commitment to advocating for the factoring industry. This commitment is not just about protecting factors but also about safeguarding the small businesses they serve. Factoring is a flexible and accessible financial solution that supports businesses in diverse industries, from manufacturing to transportation.
The potential reclassification of MCAs as factoring transactions threatens to undermine the trust and clarity that define factoring. Unlike MCAs, which often attract scrutiny for their high costs and rigid terms, factoring has a long-standing reputation as a transparent and supportive financial tool. The factoring industry should not bear the burden of regulations designed to address the practices of another financial service.
A Call to Action
The AFA is calling on all factors conducting business in Texas to join this critical effort. Advocacy will require financial support, grassroots involvement, and a unified industry voice to educate legislators and stakeholders about the differences between factoring and MCAs.
The AFA and the Texas Chapter of the IFA are organizing a Teams meeting on December 17th at 11 a.m. Central to discuss strategies for addressing the proposed legislation. This meeting will provide an opportunity for factors to collaborate, share insights, and prepare for the challenges ahead. To receive an invitation, email Jason Medley at JMedley@SpencerFane.com.
This is not just a Texas issue. The outcome of the 2025 legislative session will have implications for factors nationwide. By standing together, the factoring community can protect the integrity of its transactions, preserve access to capital for small businesses, and prevent the spread of burdensome legislation to other states.
The Broader Implications
The renewed MCA-backed bill represents a significant challenge, but it also offers an opportunity for the factoring industry to demonstrate its value and advocate for fair treatment. By engaging in this effort, factors can not only defeat harmful legislation but also set the stage for broader discussions about financial regulation.
The AFA also plans to use the lessons learned in Texas as a model for opposing MCA-sponsored legislation in other states. This proactive approach will help ensure that factoring remains distinct from other financial services and that its benefits are preserved for businesses across the country.
Join the Effort
To get involved or learn more about how you can support this initiative, please contact Cole Harmonson at cole@darebizcapital.com. The factoring industry has a proud tradition of standing together in the face of challenges, and this moment is no exception.
By working collectively, we can protect the interests of the factoring community, safeguard small businesses, and ensure that factoring continues to thrive as a vital part of the financial ecosystem.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.