Commercial Financing Disclosure Rules in Texas, Explained

What Is the Texas Commercial Financing Disclosure Law?

In 2021, Texas passed Senate Bill 1457, creating the Commercial Financing Disclosure Act. The law took effect on January 1, 2023. It requires lenders and brokers to provide a standardized disclosure form to small business owners when offering commercial financing of $500,000 or less. The goal is to make it easier for you to compare costs and terms across different funding options. The law applies to transactions made in Texas or involving a Texas-based business.

This law covers a wide range of financing products, including term loans, merchant cash advances, invoice factoring, and equipment financing. It does not apply to real estate mortgages, securities, or leases that are not considered financing. The disclosure must be given before you sign any agreement, and it must include specific information about the cost of the money.

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Which Funding Types Are Covered?

Understanding which funding types fall under the law helps you know what to expect when you receive a disclosure. The Texas Commercial Financing Disclosure Act covers:

• Closed-end loans - traditional term loans with fixed repayment schedules.
• Open-end lines of credit - revolving credit lines where you can draw and repay repeatedly.
• Merchant cash advances (MCAs) - an advance of future sales in exchange for a percentage of daily revenue.
• Invoice factoring or receivables purchase - selling your unpaid invoices at a discount for immediate cash.
• Equipment financing agreements - loans or leases specifically for purchasing equipment.

If the total amount of financing is $500,000 or less, the law generally applies. There are some exceptions, such as transactions with a financial institution that has a physical location in Texas or if the financing is secured by real estate. But for most small business funding offers you receive, you should expect a disclosure form.

What Disclosures Are Required?

The disclosure form must include several key pieces of information. While the exact layout may vary by funder, the following items are required:

Total Amount of Financing

This is the principal amount you are receiving. For an MCA, it might be the advance amount before fees are deducted. For a loan, it is the loan amount you borrow.

Annual Percentage Rate (APR)

For loans, the APR is calculated using the same formula as consumer loans, including fees and interest. For merchant cash advances and other non-loan products, the APR is calculated using a formula that treats the transaction as if it were a loan. This can result in a high APR because the cost of capital is expressed as an annual rate, even when the advance is repaid in months. The APR gives you a standardized way to compare the cost of money across different products.

Total Repayment Amount

This is the total amount you will pay back, including all fees, interest, and principal. For an MCA, it is the total payback amount (e.g., $12,000 on a $10,000 advance at a 1.2 factor rate).

Payment Schedule

The disclosure must show the amount of each payment, how often payments are made, and the total number of payments. For MCAs, this might be a fixed daily or weekly ACH withdrawal amount until the total is repaid.

Itemized List of Fees

Fees such as origination fees, underwriting fees, documentation fees, or prepayment penalties must be disclosed. However, the law does not require funders to disclose fees that are not charged to the borrower, such as broker fees paid by the funder.

Prepayment Policy

If you pay off the financing early, the disclosure must state whether there is a prepayment penalty or a rebate of unearned fees. This is especially important for merchant cash advances, where early repayment may not reduce the total cost.

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How to Read and Compare Disclosure Forms

Receiving a disclosure form is only useful if you know how to interpret it. Here are practical tips for comparing offers from different funders:

• Focus on the APR - Even though APR can be misleading for short-term products, it is the most consistent way to compare the cost of money across different types of financing. A lower APR generally means lower overall cost.
• Look at the total repayment amount - This is what you will actually pay. If one offer has a lower APR but a higher total repayment due to a longer term, calculate the true cost.
• Check the payment frequency - Daily or weekly payments can strain your cash flow more than monthly payments. Make sure the payment schedule aligns with your revenue cycle.
• Note any prepayment penalties - If you plan to pay off the financing early, a penalty can erase the savings. Some funders offer a rebate on unearned interest; others do not.
• Ask about fees not listed - The disclosure covers most fees, but some funders may charge late fees or returned check fees that are not included. Always ask for a full fee schedule.

For example, consider two offers for $50,000: Offer A is a 12-month term loan at 15% APR with a $500 origination fee, total repayment $57,500. Offer B is a merchant cash advance with a factor rate of 1.25, repaid in 8 months by daily ACH of $260, total repayment $62,500. The APR for Offer B would be much higher (around 50% or more) because the cost is spread over a shorter period. Using the disclosure, you can see that Offer A is cheaper overall.

Common Mistakes Small Business Owners Make

Despite the disclosure law, many business owners still fall into traps. Avoid these errors:

• Ignoring the APR on MCAs - Because the APR is high, some owners dismiss it and focus only on the factor rate. But the APR is the true cost of capital when annualized. Always compare APRs.
• Assuming all funders follow the law - While most legitimate funders comply, some may provide incomplete or confusing disclosures. If a disclosure is missing required items, ask for a corrected one or walk away.
• Not reading the fine print - The disclosure form is a summary. The actual contract may contain additional terms, such as a personal guarantee or a lien on business assets. Always read the full agreement.
• Focusing only on the monthly payment - A low monthly payment might hide a long term and high total cost. Use the total repayment amount to evaluate the true cost.
• Failing to shop around - The disclosure law makes it easier to compare offers, but only if you get multiple quotes. At least three quotes from different funders can help you spot a fair deal.

How to Use Disclosure Rules to Your Advantage

The Texas disclosure law is a tool, not a guarantee. Here is how to make it work for your business:

• Request disclosures in writing - Even if a funder verbally offers terms, ask for the written disclosure before you apply. This gives you a paper trail.
• Compare multiple offers side by side - Use a simple spreadsheet. List the APR, total repayment, term, and payment frequency. The one with the lowest total cost is usually the best deal.
• Ask about flexibility - Some funders allow you to adjust the payment schedule or offer a prepayment discount. The disclosure may not show these options, so ask directly.
• Consider working with a matching service - A free service like Apply for MCA Funding can connect you with vetted funding partners who are transparent about their disclosures. This saves you time and helps you avoid shady operators.

Remember, the disclosure law does not cap rates or fees. A funder can offer a 300% APR if they disclose it. Your job is to use the information to make an informed decision. If an offer looks too expensive, negotiate or move on.

What to Do If a Funder Doesn't Provide a Disclosure

If a funder fails to provide the required disclosure before you sign, you have recourse. The Texas Attorney General can enforce the law and impose civil penalties. As a practical matter, you should not proceed with a funder who refuses to give you a clear disclosure. That is a red flag. Instead, report the non-compliant funder to the Texas Department of Banking and look for a more transparent partner.

For small business owners in cities like Dallas, Houston, Austin, San Antonio, or El Paso, the law applies equally. Whether you run a restaurant in Austin or a manufacturing shop in Fort Worth, you deserve to know the true cost of financing before you commit.

How Apply for MCA Funding Can Help

Navigating commercial financing disclosures can be overwhelming, especially when you are busy running a business. Apply for MCA Funding (applyformcafunding.com) is a free matching service that connects you with vetted funding partners who understand and comply with Texas disclosure rules. We are not a lender, bank, or funder; we do not make credit decisions or issue funds. Instead, we help you find partners who provide clear, upfront disclosures so you can compare offers with confidence. Fill out a simple form, and we will match you with potential funders who may be a good fit for your business. Then you can review their disclosures and choose the option that works best for you.

Remember, the Texas disclosure law is your ally. Use it to ask the right questions, compare costs, and make an informed choice. The more you know, the less likely you are to sign a deal that hurts your business. Stay informed, shop around, and never hesitate to ask for clarification.