Unveiling the Disclosure Mandate: Navigating Commercial Financing Laws and Factoring Company Obligations

With Florida the latest state to enact commercial finance disclosure legislation, Jocelyne A. Macelloni and Natalie Chaiken of Barakat + Bossa PLLC provide a detailed look at the requirements and definitions of the new law, as well as how it compares to previously enacted statutes.

BY JOCELYNE A. MACELLONI AND NATALIE CHAIKEN

California, Georgia, New York, Virginia and Utah have already enacted or are in the process of enacting legislation that mandates disclosures for commercial financing transactions. This trend highlights a growing focus on transparency and consumer protection within the commercial financing sector. Therefore, financial brokers and providers should familiarize themselves with the regulations, as financial penalties can be imposed on those that fail to comply.

On June 26, Florida joined the disclosure trend when Governor Ron DeSantis signed House Bill No. 1353 (Bill).[i] The bill created the Florida Commercial Financing Disclosure Law (the “CFDL”) and part XIII of Chapter 559 of the Florida Statutes.[ii] The CFDL became effective on July 1 and will apply to commercial financing companies transacting business in Florida for transactions that are consummated on or after Jan. 1, 2024. As the CFDL explicitly defines commercial financing transactions to include account receivable purchases, factoring companies that purchase accounts receivables are subject to these disclosure requirements.[iii]

Who’s Affected?

Florida’s CFDL imposes several requirements on providers of commercial financing and brokers of such transactions. Before getting into those requirements, the bill defines a “provider” as any “person who consummates more than five commercial financing transactions with a business located in [Florida] in any calendar year.”[iv] The definition of a provider also includes “a person who enters into a written agreement with a depository institution to arrange a commercial financing transaction between the depository institution and a business via an online lending platform administered by the person.”[v] A “broker” is defined as “a person who, for compensation or the expectation of compensation, arranges a commercial financing transaction or an offer between a third party and a business in [Florida] which would, if executed, be binding upon that third party.”[vi] However, “[broker] excludes a provider and any individual or entity whose compensation is not based or dependent upon the terms of the specific commercial financing transaction obtained or offered.”[vii]

The Disclosures

The CFDL mandates that providers must provide written disclosures for the terms of certain commercial financing transactions at or prior to the consummation of the transaction.[viii] A “commercial financing transaction” is defined very broadly and includes nearly every possible type of “business purpose,” such as a secured or unsecured commercial loan, an account receivable purchase transaction and a commercial open-end credit plan.[ix] To determine whether a transaction constitutes a business purpose transaction, providers “may rely on any written statement of intended purpose signed by the business.”[x]

For any transaction less than $500,000, factoring companies must make disclosures. The written disclosure must disclose: (i) the amount of funds being provided under the terms of the agreement or total amount of funds actually disbursed to the factoring client; (ii) the total amount to be paid to the factoring company under the terms of the agreement; (iii) the total dollar amount under the terms of the agreement, which is calculated by finding the difference between the total amount of funds provided to the client and the total amount of funds to be paid to the factor; (iv) the manner and frequency of the payments, including a description of the methodology used to calculate any variable payment amount and the circumstances that may cause a payment amount to vary; and (v) the disclosure of any costs or discounts associated with prepayment.[xi]

Disclosures may alternatively use an illustrative scenario to represent a potential transaction covered by the agreement.[xii] However, this alternative scenario must be founded on an accounts receivable total amount owed of $10,000.[xiii]

Only one disclosure is required for each commercial financing facility. There is no requirement for additional disclosures due to modifications, forbearance, or adjustments to an already finalized commercial financing transaction.[xiv]

Exemptions

The CFDL does not encompass transactions exceeding $500,000 or transactions backed by real property, leases, or purchase money obligations constituting part or whole of the collateral’s price.[xv] Furthermore, the CFDL does not apply to providers that conduct fewer than five commercial transactions in Florida in one year, are federally insured depository intuitions, are regulated pursuant to the Farm Credit Act of 1971, or are licensed as a money transmitter under Fla. Stat. § 560 or by another state in the U.S.[xvi] However, it remains unspecified within the CFDL whether brokers are also excluded when the provider qualifies for an exemption.

Prohibitions for Brokers

The CFDL sets forth several prohibitions on brokers, including: assessing, collecting, or soliciting an advance fee from a business to provide broker services; making or using false or misleading representation or omitting material fact in any offers or sales of broker services; engaging, directly or indirectly, in any act that operates or would operate as a fraud or deception upon any person in connection with the offer or sale of broker services; making or using false or deceptive representation in its business dealings; or offering broker services in any advertisement without disclosing the broker’s address and telephone number.[xvii] However, brokers are permitted to solicit a business to pay for actual services that are necessary for applying for a commercial financing transaction.[xviii] This balanced approach ensures that brokers operate ethically and businesses receive the necessary support without falling victim to deceptive practices.

Enforcement

The CFDL is exclusively enforceable by Florida’s attorney general.[xix] The CFDL explicitly prohibits a private right of action.[xx] In other words, neither a factoring client nor an account debtor can bring any action against a factor based upon any statement or information contained within a disclosure.

Florida’s attorney general has the authority to seek fines for violations. The initial fine per incident is $500, with a cap of $20,000 for all aggregated violations.[xxi] For subsequent violations or for violations after receiving written notice, the fines per incident increase to $1,000, with a cap of $50,000 for all aggregated violations.[xxii] Importantly, a violation of the CFDL does not affect the enforceability or validity of the underlying commercial financing transaction.[xxiii] The separation of violations from the enforceability of the financing transaction ensures that businesses are still held accountable for their financial obligations even if a violation occurs.

Comparison

The burgeoning commercial finance disclosure trend began in 2018 with the enactment of California’s commercial financing disclosure law and continued with the enactment of the virtually identical New York commercial financing disclosure law in December 2020. The New York CDFL was later amended in February 2021. The California and New York laws are modeled after the Federal Truth in Lending Act (TILA) and require that offers of commercial financing be accompanied by TILA-like disclosures designed to help a financing applicant compare credit offers. However, unlike the TILA, both state laws do not require periodic statements.

Like in Florida, the California CFDL applies to commercial financing providers that provide $500,000 or less.[xxiv] The California CFDL arguably features the most specific disclosure requirements out of all the states. For example, the written disclosures must comply with specific formatting and content requirements.[xxv] The disclosure must include funding provided, annual percentage rate (APR), the finance charge, total payment amount and periodic payment amount or monthly cost. The written disclosures must be provided to the recipient when extending a specific commercial financing offer “to help [recipients] make an informed decision.”[xxvi] Additionally, finance providers must obtain a signed copy of the disclosures before consummation of the transaction.[xxvii]

The New York CFDL applies to non-bank commercial lenders that make small business loans of up to $2.5 million.[xxviii] The New York CFDL defines “provider” as any person who extends a “specific offer of commercial financing” to a recipient, including a person who solicits and presents such offers on behalf of a third party.[xxix] The New York CFDL specifically states that disclosures must include the (i) total amount financed; (ii) finance charge (both total and itemized); (iii) APR; (iv) estimated term of financing; (v) total repayment amount; (vi) amount and frequency of payments; (vii) description of all other potential fees and charges; (viii) prepayment charges; and (ix) description of any collateral requirements or security interests.[xxx] The regulations add category-specific rules for the computation of the finance charge and the APR, and further stipulate that the charge should be calculated to exclude "avoidable fees and charges that are not imposed as an incident of credit."[xxxi]

Utah’s commercial financing disclosure law regulates non-real estate secured commercial-purpose transactions in amounts of $1 million or less that qualify as commercial loans, commercial open-end credit plans, or accounts receivable purchase transaction.[xxxii] The Utah CFDL mandates that a financer disclose, at a minimum: (i) total funds provided; (ii) total funds disbursed (if less than funds provided); (iii) total amount to be paid the provider; (iv) the total dollar cost of the transaction; (v) payment manner, amount and frequency; (vi) prepayment penalties, if any; and (vii) funds paid to brokers.[xxxiii] Unlike in Florida, the Utah CFDL requires that covered providers register with the state.[xxxiv]

Virginia’s commercial financing disclosure law applies only to sales-based financing transactions of less than $500,000.[xxxv] The Virginia CFDL requires that sales-based financing providers disclose: (i) the total amount of the sales-based financing and the disbursement amount; (ii) the finance charge; (iii) the total repayment amount; (iv) the estimated number of payments; (v) the payment amounts; (vi) a description of all other potential fees and charges not included in the finance charge; (vii) a description of collateral requirements or security interests; and (viii) a statement of whether the provider will pay compensation directly to a broker in connection with the specific offer of sales-based financing and the amount of compensation.[xxxvi] Like the Utah CFDL, the Virginia CFDL requires that the covered providers register as such in the states.[xxxvii] Unlike the California CFDL and New York CFDL, the Virginia CFDL does not require the disclosure of an APR.[xxxviii]

Georgia’s commercial financing disclosure law appears the most similar to Florida’s. [xxxix] The Georgia CFDL requires certain providers of commercial financings of $500,000 or less to furnish various disclosures to small business borrowers before the consummation of transactions.[xl] The Georgia CDFL requires commercial financing providers to disclose: (i) total funds provided; (ii) total funds disbursed (if less than funds provided); (iii) the total amount to be paid to the provider; (iv) the total dollar cost to be paid to the provider; (v) the total dollar cost of the commercial financing transaction; and (vi) a statement of whether there are any costs or discounts associated with prepayment under the transaction.[xli]

Conclusion

Commercial financial disclosure regulations constitute a pivotal element within an escalating state-level movement of overseeing small commercial loans and financial transactions. While certain states have opted to exempt factoring companies engaged in accounts receivable acquisition, such leniency is absent in Florida’s approach. Within Florida, both traditional money lenders and factoring companies will encounter a newfound responsibility of furnishing disclosures for each individual transaction undertaken. Nonetheless, it is imperative for factoring entities to recognize the weight of the obligations mandated by these laws, as failure to do so may lead to swiftly accumulating penalties.

Jocelyne A. Macelloni is a partner and director of education at Barakat + Bossa PLLC, located in Miami. Board-certified by the Florida Bar in business litigation, Macelloni has spent more than a decade representing businesses and business owners in courts and arbitrations around the U.S., including in cross-border transactions and disputes that involve enforcing factoring companies’ and secured creditors’ rights. Macelloni can be reached at jmacelloni@b2b.legal.

Natalie Chaiken is a law clerk at Barakat + Bossa PLLC and a third-year candidate in the joint JD and MBA program at the University of Miami School of Law/Herbert Business School in Coral Gables, FL.

Footnotes

[i] FL LEGIS 2023-290, 2023 Fla. Sess. Law Serv. Ch. 2023-290 (C.S.H.B. 1353) (WEST).

[ii]  Fla. Stat. § 559.961.

[iii] Fla. Stat. §559.9611(1) (“‘Accounts Receivable purchase transaction’ means a transaction in which a business forwards or otherwise sells to a person all or a portion of the business’ accounts or payment intangibles as those terms are defined in s. 679.1021(1) at a discount to the expected value of the account or payment intangibles.”). Fla. Stat. §559.9611(6) (“‘Commercial financing transaction’ means a commercial loan, an accounts receivable purchase transaction, or a commercial open-end credit plan to the extent the transaction is also a business purpose transaction.”).

[iv]  Fla. Stat. § 559.9611(10).

[v] Id.

[vi] Fla. Stat. § 559.9611(3).

[vii] Id.

[viii] Fla. Stat. §559.9613(1) and (2).

[ix] Fla. Stat. § 559.9611(6).

[x] Id.

[xi] Fla. Stat. § 559.9613(2).

[xii] Fla. Stat. § 559.9613(3).

[xiii] Id.

[xiv] Id.

[xv] Fla. Stat. § 559.9612.

[xvi] Id.

[xvii] Fla. Stat. § 559.9614.

[xviii] Fla. Stat. § 559.9614(1).

[xix] Fla. Stat. § 559.9615(1).

[xx] Fla. Stat. § 559.9615(3).

[xxi] Fla. Stat. § 559.9615(2)(a).

[xxii] Fla. Stat. § 559.9615(2)(b).

[xxiii] Fla. Stat. § 559.9615(2)(c).

[xxiv] Cal. Code Regs. tit. 10, § 900(24)(defining “provider” to include a financer when the financer communicates a specific commercial financing offer either directly to a recipient, or a recipient's agent or broker with the expectation that the information will be shared with a recipient.)

[xxv] See Cal. Code Regs. tit. 10, § 901(a)(general disclosure requirements); Cal. Code Regs. tit. 10, § 901 (a)(7)(font requirement).

[xxvi] See Cal. Code Regs. tit. 10, § 901(a)(general disclosure requirements)

[xxvii] See Cal. Code Regs. tit. 10, § 901(a)(2).

[xxviii] N.Y. Fin. Serv. §§ 801 and 802(g).

[xxix] N.Y. Fin. Serv. § 801(h).

[xxx] N.Y. Fin. Serv. § 803.

[xxxi] N.Y. Fin. Serv. § 803(c).

[xxxii] Utah Code Ann. § 7-27-101; Utah Code Ann. § 7-27-102(11).

[xxxiii] Utah Code Ann. § 7-27-202.

[xxxiv] Utah Code Ann. § 7-27-201.

[xxxv] Va. Code Ann. § 6.2-2228 (defining “sales-based transactions” as transactions in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient).

[xxxvi] Va. Code Ann. § 6.2-2231.

[xxxvii] Va. Code Ann. § 6.2-2230.

[xxxviii] Va. Code Ann. § 6.2-2231.

[xxxix] Ga. Code Ann. § 10-1-393.18.

[xl] Ga. Code Ann. § 10-1-393.18(b)(11)(“The provisions of this code section shall not apply to a commercial financing transaction of more than $500,000.”).

[xli] Ga. Code Ann. § 10-1-393.18(e)(3).