To Whom Do the Laws Apply?
What are the Required Disclosures?
Georgia and Florida join others in passing commercial financing disclosure laws – new state regulations requiring disclosure statements from certain commercial financing providers.
Taking effect January 1, 2024, Georgia’s Senate Bill 90 and Florida’s HB 1353 enact similar language targeting business-consumer protection through financer-provider disclosure requirements – following closely states like Connecticut, California, New York, Utah, and Virginia.
Overview
Business owners in need of additional working capital to support business demand can generally turn to financing options like small business bank loans and private or commercial investors. These more traditional financing routes often require asset collateralization, personal guarantees, or commitment of equity to secure their debt repayment obligation.
The new disclosure laws consider commercial financing transactions in which collateral may be unsecured, often in the form of future revenues of the business. These arrangements are oft provided by private companies or individuals, and by assuming the liability of potential non-payment — whether due to business failure or otherwise — these lenders take an unsecured debt position. While a business owner may be saved from making personal guarantees or forfeiting equity, these financing arrangements do not guarantee protection from predatory lending or deceptive business practices; the new disclosure laws appear to confront this risk, brandishing disclosure statements as its weapon of choice.
To Whom Do the Laws Apply?
Both Georgia and Florida place the onus of transparency on certain providers of commercial financing, when such transactions are $500,000 or less and occur at least six times per year.
“Commercial financing transactions” include commercial loans, accounts receivable purchase transactions, and commercial open-end credit plans to the extent they apply to business purposes, this is specifically distinguished from personal, family, or household purposes. Each state defines “provider” as a person who consummates more than five commercial financing transactions in their state during any calendar year, including arrangements via online platform or marketplace lending.
The laws do however provide extensive and specific exclusions, including:
- Commercial financing transactions that:
- (i) Are secured by real estate;
- (ii) Are leases;
- (iii) Involve loans or open-end credit plans to a motor vehicle dealer, motor vehicle rental company, or their affiliates in amounts of $50,000 or more;
- (iv) Is offered by a person in connection with the sale or lease of products or services that such person, or their affiliates, manufactures, licenses, or distributes; and
- Providers that:
- (i) Are federally insured depository institutions or subsidiaries, affiliates, or holding companies of such institutions;
- (ii) Are regulated under the federal Farm Credit Act, 12 U.S.C. Section 2001, et seq.; or
- (iii) Are licensed money transmitters under applicable law.
What are the Required Disclosures?
The financing provider is burdened with suppling the required disclosures to the borrower—similar to those of the federal Truth in Lending Act (TILA)—at or before the consummation of the transaction. The disclosure statements must include:
- Total amount of funds provided to business-borrower;
- Total amount of funds actually disbursed to business-borrower (may be less than the “provided” amount due to fees, withholdings, or other third-party obligations);
- Total amount to be paid to provider;
- Total cost of transaction (calculated by subtracting total amount of provided funds from total amount of payments);
- A payment schedule, including calculation methodology for variable payments; and
- Any information regarding prepayment options/penalties/etc.
What are the Consequences of Non-Disclosure?
Both Florida and Georgia reserve the power of enforcement for the Attorney General, explicitly annulling private right of action against any person based on failure to comply with the provisions. A violation of the code sections, however, will not affect the enforceability of any underlying agreement. Violators are subject to a civil penalties ranging from $500 to $20,000 per violation, with penalties increasing to $1,000 to $50,000 per violation for repeat offenders.
Takeaways
These bills seem to be rooted in transparency, fair business, and borrower protection — all part of growing trends in state-supported financing disclosures and proactivity against predatory practices, but what is the practicality of compliance?
While the financing disclosures do create additional burden for some transactions, they should create minimal practical impact. With the information required for the disclosure statements mirroring information already required in similar transactions, and representing best practices, Florida bill analysts admit the private sector “impact is indeterminate, yet likely insignificant.”
Questions remain:
- How will a business borrower know when such disclosures are required?
- Do you qualify as a provider, and what happens if you unintentionally become a provider after the fact?
- How will the Attorney General practically approach enforcement?
- Why are these seven states, including Georgia and Florida, just now enacting such requirements? Will more states follow suit?
We will continue to monitor potential commercial financing disclosure legislation in other states across our law firm’s footprint, and we encourage anyone who has questions about these laws or are impacted by these regulations to contact legal counsel or their financial services consultant.
About Bennett Secrest: An attorney in the Adams and Reese Atlanta office, Bennett represents growing startups and established middle-market organizations in their corporate and transactional legal needs. He advises corporate officers, founding teams, and organizations on corporate governance, operations strategy, mergers and acquisitions, real estate purchase and leasing, and contract management. Through his involvement in Atlanta’s startup community, Bennett has advised beginning and growth-stage companies through founder negotiations, strategic structuring, equity incentive initiatives, venture financing, asset and IP protection, and strategizing “scale & sale” initiatives. Bennett is a former tax consultant, from “Big 4”, where he advised private equity and REIT clients through complex transactional and tax strategies.