February 27, 2025
Several bills are pending in state legislatures that could dramatically affect sales-based financing transactions in their respective states. Bills pending in Illinois and Maryland would subject such transactions, along with other commercial-purpose financing, to significant regulation. A bill pending in Pennsylvania would be less extensive but would still subject sales-based financing transactions to disclosures, including an APR disclosure. Finally, a bill pending in New York would subject sales-based financing and other types of financing to state usury caps as if the transactions are loans.
Illinois and Maryland: Illinois House Bill 2595, the "Small Business Financing Transparency Act," and Maryland House Bill 693, the "Small Business Truth in Lending Act," would each regulate commercial-purpose financing that does not exceed a certain dollar threshold. The bills are largely patterned after existing commercial financing disclosure laws in California and New York. The Illinois bill would require a commercial financing provider to register with the state's Department of Financial and Professional Regulation. The bills define "commercial financing" broadly, including sales-based financing, factoring, and open- and closed-end loans in the definition. However, they have different dollar thresholds; the Illinois bill would exempt any transaction with an amount financed greater than $500,000, while the Maryland bill would exempt only a transaction with an amount financed greater than $2.5 million.
Each bill would require disclosure of an estimated annual percentage rate, along with other information about the proposed transaction, when a provider makes a specific offer of commercial financing. Under each bill, a sales-based financing provider must estimate APR based on the estimated term of repayment and projected sales volume of the recipient of the financing. These sales projections must be calculated by either the "historical method," using the recipient's past monthly sales volumes, or the "underwriting method" (Illinois) or "opt-in method" (Maryland), using any method that the provider chooses. A provider using the underwriting or opt-in method would be required to report initial, estimated APRs and retrospective, actual APRs to the regulator, who would decide whether the discrepancy between the two was acceptable. The Illinois bill would establish additional reporting requirements for providers of sales-based financing, regardless of the method that a provider uses to project sales volumes.
Penalties for violations of the Illinois law would include civil penalties of up to $10,000 per violation or $50,000 per series of similar violations. Violators could also be liable for restitution or other relief to recipients, and they could have their registrations suspended or revoked. Penalties for violations of the Maryland law would include civil penalties of up to $2,000 per violation or $10,000 per willful violation, with no cap on penalties for similar violations. Restitution would also be available. The Illinois bill would take effect upon its passage, but the registration and disclosure requirements could not take effect before January 1, 2026. The Maryland bill would take effect on October 1, 2025.
Pennsylvania: Pennsylvania House Bill 639, which would amend the Loan Interest and Protection Law, would function somewhat differently from the Illinois and Maryland bills. The Pennsylvania bill would add disclosure requirements for providers of commercial financing to small businesses, including a requirement to disclose a transaction's APR. Instead of using a dollar threshold, the bill would define the term "small business" to mean a business of fewer than 500 employees. The bill would not define the term "commercial financing," making it potentially applicable to any form of commercial financing. It also would not specify a method for estimating APR in sales-based financing transactions, nor would it even acknowledge that a disclosed APR at the start of a sales-based financing transaction must be an estimate.
The Pennsylvania bill would use the existing remedies in the LIPL, which include a $10,000 fine per offense, injunctive relief, restitution, and other remedies. The Pennsylvania bill would take effect 60 days after its passage.
New York: New York Senate Bill 1726 would apply the state's existing usury caps to all "financing arrangements." The bill's definition of "financing arrangement" expressly includes sales-based financing agreements. New York's civil usury rate is 16%, except where another law (such as a licensing law) authorizes a greater rate of interest. Any usurious obligation is void. Additionally, a person or entity charging more than 25% is subject to criminal penalties. An obligation of $250,000 or more, other than an obligation secured by one- to two-family residential real property, is exempt from the civil usury cap but not the criminal usury cap. An obligation of $2.5 million or more is exempt from both the civil usury cap and the criminal usury cap. If passed, the bill would take effect immediately.
We will continue to track these bills as well as other legislation that could affect commercial financing.