Texas boasts the second-largest economy in the United States and is home to a significant concentration of capital-intensive, small-to-medium-sized businesses (SMBs). From independent oil and gas contractors in the Permian Basin to major logistics hubs in Dallas and construction firms in Houston, Texas businesses often require consistent working capital to support growth and maintain daily operations.
When traditional banks tighten their underwriting criteria or require extensive credit histories, Texas business owners may turn to the alternative finance sector to bridge operational cash flow gaps. A common source of this capital is the Merchant Cash Advance (MCA). While MCAs can provide rapid access to funding, their unique structures, use of factor rates, and potentially high-frequency daily bank withdrawals can place significant pressure on operating cash flow, particularly when businesses are managing multiple advances and MCA debt accumulation.
Historically, the alternative commercial finance sector in Texas operated without many of the disclosure requirements applicable to traditional lending. However, that regulatory landscape has recently changed. Following legislative developments in states such as New York and California, Texas enacted House Bill 700 (HB 700), introducing new requirements designed to increase transparency and oversight of certain commercial sales-based financing transactions.
If you are a Texas business owner relying on alternative capital, understanding how these new state requirements interact with existing Texas commercial financing and usury laws can provide valuable insight into your financing arrangements. This comprehensive guide explores Texas’s commercial financing regulations, how courts may evaluate MCA agreements, and potential options for addressing MCA debt when high-frequency payments place pressure on business cash flow.
1. The New Regulatory Era: Texas House Bill 700
For years, a significant concern surrounding alternative commercial financing has been the lack of transparency prior to signing. Business owners may encounter complex contracts that make the total cost of capital difficult to understand. To address these concerns, the Texas Legislature enacted House Bill 700 (HB 700), establishing new regulatory requirements for MCAs and other commercial sales-based financing transactions.
Codified under Texas Finance Code Chapter 398 (Commercial Sales-Based Financing), this legislation establishes requirements for covered providers and brokers offering commercial sales-based financing to Texas businesses, including certain out-of-state companies operating in Texas.
Under the new law, providers extending specific offers of commercial sales-based financing of less than $1 million to Texas businesses must provide certain standardized written disclosures before the transaction is finalized. These disclosures include:
- The Total Financing Amount: The gross amount of capital the funder is providing.
- The Disbursement Amount: The actual, net amount of funds provided to the business reflecting applicable fees, commissions, or other deductions.
- The Finance Charge: The total dollar cost of the financing.
- The Total Repayment Amount: The total amount the Texas business is obligated to pay the funder under the agreement.
- The Payment Schedule: If the payments are fixed, the amount and frequency of the daily or weekly payments. If the payments vary, the applicable payment schedule or calculation method and average projected monthly payments.
- The Estimated Payment Period: The estimated time required for periodic payments to equal the total repayment amount.
- Additional Fees and Prepayment Terms: Information regarding certain potential fees and charges not included in the finance charge, along with applicable costs associated with early payment or refinancing.
The Critical Omission: No APR Requirement
While HB 700 represents a significant step toward greater transparency for Texas business owners, it contains a major differentiator from similar disclosure laws in California and New York. Texas does not require funders to disclose an estimated Annual Percentage Rate (APR) under HB 700. The law also prohibits the Finance Commission of Texas from establishing a maximum APR, finance charge, or fee for covered commercial sales-based financing transactions.
In the merchant cash advance space, funders commonly quote their costs using a factor rate, which outlines the total repayment amount but does not, by itself, take into account the length of time over which the financing is repaid or express the cost as an annualized percentage rate. Because Texas does not mandate an APR disclosure, business owners may need to separately determine the annualized cost of the financing to better understand its overall financial impact.
2. Important Protections: COJs and ACH Debits
Beyond transparency, Texas Finance Code Chapter 398 introduces two significant legal protections for business owners that affect how MCA funders may enforce certain contractual provisions and collect payments in the state.
Voiding Confessions of Judgment (COJs)
Historically, some MCA contracts included a Confession of Judgment (COJ) provision. By signing a COJ, a business owner could authorize a funder to obtain a judgment against the business without first pursuing a traditional lawsuit, potentially limiting the business’s opportunity to contest the claim before judgment was entered.
Texas law now places significant restrictions on this practice. Under Section 398.055, a covered commercial sales-based financing contract containing a confession of judgment "or any similar provision" is void and unenforceable. This prohibition provides Texas businesses with additional protections against certain contractual collection tactics.
Restricting Automatic Bank Debits
A common factor that contributes to MCA debt accumulation is the use of fixed daily ACH withdrawals. When a business experiences a temporary drop in revenue, these high-frequency payments can place significant pressure on operating cash flow, potentially increasing the risk of missed payments or taking on additional financing obligations.
Texas HB 700 introduced an important restriction on how covered funders can access a merchant's bank account for automatic withdrawals. Under Section 398.056, providers and brokers are prohibited from establishing a mechanism for automatically debiting a recipient’s deposit account unless they hold a validly perfected, first-priority security interest in that account under the Texas Uniform Commercial Code.
Because many MCA providers rely on general Uniform Commercial Code (UCC-1) blanket liens, those filings may not necessarily satisfy the requirements for a perfected, first-priority security interest in the specific deposit account. Whether a particular arrangement meets these requirements depends on the underlying agreement, the security interest, and applicable law.
This provision gives Texas businesses additional protections regarding certain automatic debit arrangements, although its application depends on the specific transaction and circumstances.
3. Texas Usury Laws and the "True Sale" Legal Test
While Chapter 398 regulates disclosures and certain collection practices, it does not establish a cap on the cost of commercial sales-based financing. Texas enforces usury laws that impose penalties for interest charges exceeding applicable legal limits, but some MCA providers assert these laws do not apply to their transactions because they are structured as purchases of future receivables rather than traditional loans.
However, where the nature of a transaction is disputed, Texas courts may look beyond the "MCA" label and examine whether the agreement operates as a genuine purchase of future receivables or as a loan. Texas courts have applied long-standing usury principles articulated in cases like Holley v. Watts, which considers whether a transaction involves a loan of money, an absolute obligation to repay the principal, and compensation exceeding the amount permitted by law.
Under traditional Texas usury principles, whether there is an absolute obligation to repay the principal is an important factor in determining whether a transaction is a loan. In a genuine true sale, the funder generally assumes some risk associated with the business's future performance. If the business's revenue drops, the funder's collections should adjust based on the terms of the agreement.
When determining whether an absolute repayment obligation exists, courts typically consider the MCA's reconciliation clause. This contractual provision generally allows the merchant to request an adjustment to its payments when actual sales revenue declines.
- If the contract lacks a meaningful reconciliation clause, or if the reconciliation is difficult to exercise in practice, fixed payment obligations may be one factor considered when evaluating whether the transaction operates more like a loan.
- If the funder relies heavily on personal guarantees or other substantial recourse against the business or its owners, those provisions may also be relevant to the overall characterization of the transaction.
The Penalty for a Disguised Loan in Texas
If a Texas court determines that an MCA is actually a disguised loan, it becomes subject to the state's commercial usury ceilings. For commercial credit in Texas, the penalty for charging usurious rates is severe. Under the Texas Finance Code, the lender can be liable for three times the excess interest charged, plus the business's reasonable attorney’s fees.
It is important to note that Texas law includes "cure rights" for lenders. If a business files a usury claim, they must give the funder 60 days' written notice, allowing the funder the opportunity to correct the violation and refund the excess interest before facing the multiplier penalty. Nonetheless, the threat of usury recharacterization remains one of the most powerful tools in Texas commercial debt negotiations.
4. Enforcement Limitations: No Private Right of Action
While the new Texas disclosure laws provide robust protections, their enforcement mechanism is highly specific. Chapter 398 designates state regulatory bodies (such as the Texas Department of Banking and the Office of Consumer Credit Commissioner) to enforce the disclosure and registration rules. Providers who violate the law are subject to a $10,000 civil penalty per violation.
Crucially, Section 398.102 explicitly states that the statute does not create a private right of action. This means a Texas business owner cannot file a lawsuit against a funder solely because the funder failed to provide the proper Chapter 398 disclosure form.
However, this does not mean business owners are defenseless. While you cannot sue directly under the disclosure statute, business owners still retain their standard legal rights to sue for fraud, breach of contract, or usury violations if the transaction fails the true sale test.
5. MCA Debt Relief in Texas: Restructuring Your Obligations
Texas’s commercial financing laws provide critical transparency at the exact moment a funding offer is extended. By requiring detailed breakdowns of the net disbursement and total repayment obligations, the law equips business owners to make data-driven decisions and avoid toxic capital.
However, disclosure laws only assist you before you sign the contract. If your Texas enterprise is already trapped in a cycle of overlapping daily ACH withdrawals, reviewing the law will not restore your cash flow. When multiple funders are sweeping cash simultaneously and MCA debt accumulation is threatening your ability to make payroll, you require a highly strategic, customized resolution plan.
When daily obligations exceed incoming revenue, commercial debt settlement is often the most viable path forward. This process involves utilizing experienced negotiators to intervene directly with funders, seeking to reduce principal balances and convert high-frequency daily sweeps into manageable, long-term payment schedules.
6. Securing the Future of Your Enterprise with Coastal Debt Resolve
Texas business owners are the backbone of a booming state economy, but navigating the complexities of the alternative finance sector requires objective, specialized knowledge. Understanding the strict mechanics of factor rates, the aggressive new protections against Confessions of Judgment, and the legal boundaries of a true sale transaction empowers you to make calculated, highly informed decisions about your capital.
If your enterprise is currently managing overlapping commercial financing agreements and high-frequency bank withdrawals are constraining your daily operations, taking decisive action is essential. Do not wait for a seasonal revenue dip or an unexpected supply chain disruption to force your business into default.
Coastal Debt Resolve is dedicated to providing Texas businesses with transparent, analytical, and highly effective B2B MCA debt relief and commercial debt resolution services. We do not provide consolidation loans, nor do we attempt to mask a structural cash flow problem by layering on additional high-cost capital. Our core mission is to preserve your operational independence by permanently reducing your commercial obligations so your business can return to profitability.
Let our experienced advisors forensically audit your Texas commercial contracts, evaluate your operational cash flow, and build a customized negotiation strategy designed to restore your financial stability. Contact Coastal Debt Resolve today at (888) 707-7177 for a free, confidential consultation, and regain control of your company's financial future.
