To whom do the laws apply?
What are the required disclosures?
Georgia and Florida join others in passing commercial finance disclosure laws — new state regulations requiring disclosure statements from certain commercial finance providers.
Effective January 1, 2024, Georgia Senate Bill 90 and Florida Senate Bill HB 1353 enact similar language aimed at protecting businesses and consumers through disclosure requirements between funders and providers — following states such as Connecticut, California, New York, Utah and Virginia.
overview
Entrepreneurs who need additional working capital to meet business demand generally have access to financing options such as bank loans for small businesses and individual or commercial investors. These more traditional forms of financing often require asset collateral, personal guarantees or the provision of equity to secure the repayment obligation.
The new disclosure laws allow for commercial financing transactions where collateral may be unsecured, often in the form of future company earnings. These arrangements are often made by private companies or individuals, and by assuming liability for potential defaults, whether due to business failure or otherwise, these lenders create an unsecured debt position. While a business owner may be protected from posting personal guarantees or forfeiting equity, these financing arrangements do not protect against predatory lending or fraudulent business practices; The new disclosure laws appear to counteract this threat, using disclosure statements as their weapon of choice.
To whom do the laws apply?
Both Georgia and Florida impose transparency requirements on certain commercial finance providers when such transactions are $500,000 or less and occur at least six times a year.
“Commercial Financing Transactions” include commercial loans, accounts receivable transactions and commercial perpetual credit schemes provided they are for a business purpose; this is expressly distinguished from personal, family or household purposes. Each state defines “provider” as an individual who completes more than five commercial financing transactions in their state in a calendar year, including online platform or market lending arrangements.
However, the laws provide extensive and specific exclusions, including:
- Commercial financing transactions that:
- (i) secured by real estate;
- (ii) they are rental agreements;
- (iii) include loans or perpetual lines of credit to an automobile dealership, automobile rental company or their affiliates of US$50,000 or more;
- (iv) offered by any person in connection with the sale or rental of any products or services that that person or its affiliates manufacture, license or distribute; And
- Providers who:
- (i) it is a government-insured custodian or a subsidiary, affiliate or holding company of such institution;
- (ii) subject to the Federal Farm Credit Act, 12 USC Section 2001 et seq.; or
- (iii) are licensed money transmitters under applicable law.
What are the required disclosures?
The lender is required to provide the borrower with required disclosures – similar to those required by the federal Truth in Lending Act (TILA) – upon or prior to the closing of the transaction. The disclosure statements must contain the following:
- total amount of funds made available to the corporate borrower;
- Total amount of funds actually disbursed to the corporate borrower (may be less than the “provisioned” amount due to fees, withholdings or other third party obligations);
- total amount to be paid to the provider;
- Total cost of the transaction (calculated by subtracting the total amount of funds committed from the total amount of payments);
- A payment plan, including variable payment calculation method; And
- All information on prepayment options/penalties/etc.
What are the consequences of secrecy?
Both Florida and Georgia reserve enforcement authority for the Attorney General and expressly exclude private right of action against individuals based on non-compliance. However, a violation of any section of the Code does not affect the enforceability of the underlying agreement. Civil penalties range from $500 to $20,000 per violation for violators and $1,000 to $50,000 per violation for repeat offenders.
takeaways
These bills appear to be based on transparency, fair dealing and borrower protection — all part of growing trends in disclosure of government-backed funding and pro-activity against predatory practices. But how practical is compliance?
While the financing disclosures add an additional burden to some transactions, they are likely to have minimal practical implications. Because the information required for the disclosure statements reflects information previously required in similar transactions and represents best practices, Florida law analysts acknowledge that “the private sector impact is uncertain but likely to be insignificant.”
Questions remain:
- How does a business borrower know when such disclosures are required?
- Do you qualify as a vendor and what happens if you unintentionally become a vendor afterwards?
- How will the Attorney General approach enforcement practically?
- Why are these seven states, including Georgia and Florida, enacting such requirements right now? Will other states follow this example?
We will continue to monitor potential commercial financing disclosure laws in other states throughout our law firm’s jurisdiction and encourage anyone who has questions about, or is affected by, these laws to consult legal counsel or their financial services advisor.
