What Happened?
Following the path of nine other states that have enacted laws to regulate commercial non real estate secured financing, on May 28, 2025, the Texas legislature passed a “commercial sales-based financing” bill, known as House Bill 700[1], and the Governor Greg Abbott signed the bill into law on June 20, 2025. Unlike other state laws that have required providers of commercial financing to make Truth-in-Lending-type disclosures to borrowers, and in some instances, register with state authorities, the Texas legislation caps the cost of “sales-based financing,” which is defined as “a transaction that is repaid by the recipient to the provider of the financing as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient or according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.” Most provisions of the law become effective on September 1, 2025, except for the provider and broker registration requirement, discussed below, which takes effect on December 31, 2026.
Why It Matters
Notably, the Texas legislation includes a provision that prohibits sales-based financing providers from establishing a “mechanism for automatically debiting a recipient’s deposit account” unless the provider obtains and perfects a security interest in the recipient’s account with “first priority” against the claims of “all other persons.” As a practical matter, no provider is likely to meet this standard. Under the Uniform Commercial Code, a security interest in a deposit account can only be perfected by entering into a deposit account control agreement with the bank at which the account is maintained. These control agreements typically provide a creditor with lien priority against the claims of other secured creditors, but not against the claims of the bank itself. Because the claims of the bank will be superior to the claims of the sales-based financing provider, no provider would be able to satisfy the Texas requirement that the provider’s interest have priority against the claims of “all other persons.” This requirement is significant because most sales-based financing transactions require payment via automated clearing house (ACH) debit entries to the recipient’s deposit account. It is unclear whether providers will be able to devise alternative payment methods or whether such alternative payment methods will negatively impact the performance of sales-based finance transactions.
Further, the legislation amends Texas law to exclude “sales-based financing” from Texas’s usury exemption. Under the new legislation, fees and charges paid or charged under a “sales-based financing” transaction count as interest under state usury law, regardless of the amount financed. However, the legislation does not require disclosure of an APR or interest rate, and it is not clear how the interest rate of a “sales-based financing transaction” would be determined for usury purposes.
The Texas legislation requires providers who extend specific offers of commercial “sales-based financing” of less than $1,000,000 to disclose to Texas-based recipients, among other things, (1) the total amount of the financing; (2) the disbursement amount; (3) the finance charge; (4) the total repayment amount; and (5) the estimated period for the periodic payments to equal the total repayment amount under the terms of the financing.
The legislation requires financers (i.e., “providers”) and brokers of “sales-based financing” transactions to register with the Texas Office of Consumer Credit Commissioner and to renew their registrations annually by January 31. The legislation exempts from its requirements banks (specifically including out-of-state banks) and their subsidiaries and affiliates, certain companies that provide tech services to exempt entities, lenders regulated under the Farm Credit Act, real property secured sales-based financing, true (operating) leases, and certain a commercial sales-based financing agreement or commercial open-end credit plan of $50,000 or more.
Again, most provisions of the law become effective on September 1, 2025, except for the provider and broker registration requirement, which takes effect on December 31, 2026.
A person who violates the law would be subject to a civil penalty of $10,000 for each violation, but the legislation does not authorize a private right action for violations arising under the law.
What To Do Now
The Texas legislation, while part of a growing trend of augmented state regulation of commercial non real estate secured lending, is far more burdensome than other similar state laws enacted to date, and at first blush, absent an exemption, may render it extremely difficult, if not impossible, to conduct sales-based financing in Texas. Only time will tell whether lenders can devise alternative financing methods that are not ensnared by the legislation or whether the legislature amends the law.
[1] https://legiscan.com/TX/text/HB700/2025
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