Andrew Coon, CEO of CapFlow Funding.
California’s commercial financing disclosure law introduces new compliance requirements for funders operating in the state of California. Designed to provide small businesses with clearer insights into their financing terms, the law applies to a broad range of financing products, including invoice factoring. It emphasizes detailed and standardized disclosures, creating new considerations for funders as they adjust their processes to align with these mandates.
In my role, I’ve witnessed many funders in the factoring industry being unable to fund in California due to the state’s regulations. These regulations can be complicated, costly and time-consuming. Therefore, I believe this information is essential to help our merchants stay compliant and on top of the changing landscape.
What Is California’s Commercial Financing Disclosure Law?
California’s law, officially known as SB 1235, mandates clear and consistent disclosures for various types of commercial financing. Funders are now required to provide small businesses and merchants with detailed information about their financing agreements, including:
• The total cost of financing, expressed as an estimated annual percentage rate (APR)
• Payment terms and schedules
• Potential prepayment penalties or conditions
• A breakdown of fees and additional charges
The law applies to a range of financial products, including invoice factoring and revenue-based financing, making it one of the most comprehensive efforts to regulate alternative financing. Unlike consumer lending laws, this disclosure law targets small businesses, ensuring they have the information needed to make informed financial decisions.
Challenges For Funders Operating In California
For funders, the law presents significant operational and logistical challenges:
• Calculating APR For Nontraditional Products: Revenue-based financing and factoring often don’t align with traditional loan structures because they are open-ended purchases of receivables. Calculating an APR for products with flexible repayment terms and undefined payment terms can be complex and resource-intensive.
• Contract Adjustments: Funders must revise their contracts to include standardized disclosures, which may require extensive collaboration with legal teams and compliance experts.
• Increased Operational Costs: Compliance demands, such as upgrading software to generate accurate disclosures or training teams to understand the new requirements, could lead to higher overhead costs.
Opportunities Created By The Law
While challenging, the disclosure law also presents a range of opportunities for funders:
• Being A California-Disclosure Complaint Funder Where Many Will Not: California-compliant disclosures demonstrate a commitment to ethical practices, and staying on the right side of regulation.
• Enhancing Industry Credibility: By meeting or exceeding disclosure requirements, funders can set themselves apart as leaders in responsible financing.
• Driving Innovation: The need to adapt may accelerate the adoption of new technologies, such as automated compliance tools and enhanced underwriting processes.
A National Ripple Effect
California is not alone in its push for transparency. States such as New York, Utah and Virginia (to name just a few) have enacted similar laws, and others are considering proposals that mirror these requirements. This trend raises the possibility of a federal standard that would unify disclosure practices across all states.
For funders operating nationwide, the challenge lies in navigating a patchwork of state regulations while preparing for the possibility of broader federal oversight. Forward-thinking funders should consider investing in systems, personnel and processes to ensure compliance across jurisdictions.
Best Practices For Navigating Compliance
It’s important for funders to embrace proactive strategies to stay ahead of these regulatory changes. Here are a few best practices for funders operating in California and beyond:
1. Leverage technology. Invest in tools that automate disclosure generation, ensuring accuracy and consistency across contracts.
2. Train your teams. Educate sales and underwriting teams on effectively communicating the nuances of the new disclosures to clients.
3. Monitor regulatory updates. Stay informed about evolving laws in other states to avoid compliance pitfalls and to capitalize on opportunities.
4. Collaborate with legal experts. Partner with experienced compliance professionals to adapt contracts, processes and policies to meet new standards.
The Road Ahead
California’s disclosure law is one of several new regulations being introduced to govern the commercial financing industry. These laws require funders to adjust their practices to meet evolving compliance standards. As similar regulations emerge in other states, funders, businesses and merchants need to stay informed and prepared to navigate the changes. Awareness and education will be key to ensuring compliance and adapting to the shifting regulatory landscape.
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