March 17, 2025
The Texas Legislature is considering a bill to regulate sales-based financing transactions. If passed, Senate Bill 2677 would be the first in the nation to cap the cost of sales-based financing. The bill would define the term "sales-based financing" to mean 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. Unlike other laws regulating sales-based financing, the bill does not include an exemption for low-volume providers. If enacted, the bill would take effect on September 1, 2025, except for the broker registration requirement, which would take effect on January 1, 2026.
Under S.B. 2677, fees and charges paid or charged under a sales-based financing transaction count as interest under state usury law, regardless of the amount financed. Texas's usury cap adjusts between 18% and 28% and is currently 18%, according to the website of the Texas Office of Consumer Credit Commissioner. Because the bill does not require disclosure of an APR or interest rate, it is unclear how the interest rate of a sales-based financing transaction would be determined for usury purposes.
The bill specifies that a sales-based financing transaction is not an "account purchase transaction" (account purchase transactions are exempt from Texas usury law), regardless of the amount financed. An account purchase transaction includes factoring and, according to at least one Texas court, sales-based financing agreements. See Express Working Capital, LLC v. Starving Students, Inc., 28 F.Supp.3d 660 (N.D. Tex. June 24, 2014) (explaining that agreements to purchase future credit card receipts were account purchase transactions under Texas law, not loans). As a result, the bill amends Texas law to exclude sales-based financing from this statutory exemption from usury.
Like other laws regulating sales-based financing, S.B. 2677 requires a provider to give certain disclosures to a recipient before consummation of a transaction. The required disclosures include the amount financed, amount disbursed, finance charge, total repayment amount, estimated term, estimated payment schedule, list of non-finance charge fees, finance charges and fees payable upon prepayment, collateral requirements, and (for renewal financing) whether any part of the amount financed will be used to pay down finance charges or prepayment fees on a previous transaction. The bill requires these disclosures for a transaction with an amount financed greater than $500,000.
The bill requires brokers of sales-based financing transactions to register with the Texas Department of Banking and to renew their registrations annually by January 31. The bill does not require financers to register.
The bill provides for a maximum penalty of $10,000 per violation or $100,000 per series of violations. It also declares a violation to be a deceptive trade practice, indirectly granting a private right of action.