Florida and Georgia Adopt New Commercial Finance Disclosure Laws: A Look at their Impact on Small Businesses

Small businesses are the backbone of local and national economies, but they often struggle to access financing options that will help them grow and thrive. In an attempt to protect small businesses from bad financial practices, Florida and Georgia are the latest states to have adopted commercial finance disclosure laws (CFDLs).   These neighboring states have adopted virtually identical laws and follow California, New York, Virginia, Utah and Connecticut (the Connecticut law goes into effect in mid 2024) in adopting CFDLs.  Several other states are considering the passage of CFDLs and are likely to be adopted in 2024.  We have previously reported on the scope of the CFDLs in prior posts.

Each of the states that have adopted CFDLs have a different take on what is required but they all require disclosure of certain key terms so that small business borrowers can make informed business decisions when comparing different financial products.  They generally include a disclosure of the funds provided, any deductions to pay fees and other charges, the aggregate repayment amount, the total finance charge or cost of the financing, the payment terms including amount and frequency and any additional charges and requirements in connection with prepayment.  Additionally, California any New York require the disclosure of the annual percentage rate (or “APR”) based upon assumption of repayment of the financing in accordance with the contract terms and the average monthly cost of the financing.  New York also requires disclosure of collateral requirements, avoidable fees and charges and whether any portion of the financing is being used to pay off unpaid finance charges in connection with a previous financing, so called “double dipping.”  Utah and New York also require a disclosure on payments to brokers who arranged the financing.  Utah, Virginia and Connecticut will also require that financial product providers’ register and obtain a license to do business in their states. By requiring financial product providers to disclose these key features upfront, small business owners can make informed decisions about their financial future.

Many small businesses struggle to keep up with loan terms, especially when they are not clearly communicated upfront. With these new regulations, small businesses in these states will have a better understanding of what they need to do to avoid defaulting on their loans and falling deeper into debt. Furthermore, the laws also provide penalties for lenders who violate these regulations. The legislation not only helps protect small businesses from being taken advantage of but also ensures that lenders are held accountable for certain predatory practices. This accountability can help improve the overall lending practices and promote healthy competition within the industry, something that will benefit small businesses.

The New Georgia and Florida CFDLs:

As noted, these laws are virtually identical and go into effect on January 1, 2024. They apply to a broad range of financial product offerings including commercial loans, commercial open-end credit plans, merchant cash advance and accounts receivable purchase transactions.

Providers are obligated to provide written disclosures to businesses before or at the consummation of a commercial financing transaction. These disclosures include:

1. The total amount of funds provided to the business.
2. The total amount of funds disbursed to the business, considering any deducted or withheld fees at disbursement and any payments made to a third party on behalf of the business.
3. The total amount to be paid to the provider.
4. The total dollar cost of the commercial financing transaction, calculated by subtracting the total amount of funds provided from the total payment amount.
5. The manner, frequency, and amount of each payment, or if variable payments are involved, an estimated initial payment and the methodology used for its calculation.
6.  Relevant information about prepayments.

Prohibited Acts
Under the Florida and Georgia laws, brokers arranging consumer financing transactions are forbidden from engaging in the following acts:

1. Collecting or soliciting an advance fee from a business to provide services to a broker. However, there are exceptions for necessary services like credit checks or appraisals of security, provided specific conditions are met.
2. Making false, misleading, or omission of material facts in the offer or sale of a broker’s services, or engaging in any act that could be considered fraud or deception in connection with the offer or sale of the broker’s services.
3. Using false or deceptive representations in business dealings.
4. Advertising the services of a broker without disclosing the actual address and telephone number of the broker’s business.

Florida and Georgia impose civil fines for violations, ranging from $500 per incident to $20,000, with potential additional penalties for aggravated violations. It’s worth noting that violations do not affect the enforceability of the transactions or provide a basis for a private right of action.

For small business owners, these regulations represent a much-needed layer of protection against predatory lending practices. By requiring lenders to be more transparent and accountable, small businesses can feel more secure when seeking financing. As with any new law, there may be some challenges and unintended consequences, but the potential benefits of these regulations are significant. As noted, other states will be following with their own CFDLs in 2024, helping to improve the overall lending industry and promote a healthier, more prosperous economy for everyone.