On March 22, the Virginia legislature sent HB1027 (act) to the governor. If signed by April 11, the law will impose the nation’s first registration requirement for financing providers and sales-based brokers.
Virginia would also be the third state to create commercial finance disclosure requirements applicable to sales-based financing, following New York and California. The New York and California requirements have not yet come into effect due to regulatory delays.
What is sales-based financing under HB1027?
HB1027 imposes requirements related to “sales-based financing”.
Sales-based financing is a transaction that is reimbursed by a recipient Virginia business as a percentage of sales or revenue, in which the payment amount may increase or decrease depending on the volume of sales or revenue received by the business. . The term also includes a transaction with a funding adjustment mechanism that is repaid as a fixed payment but provides a reconciliation that “adjusts the payment” to an amount that is a percentage of sales or revenue.
This definition does not distinguish between sales and loans and therefore covers both merchant cash advances and loans that otherwise meet the definition. However, it is unclear whether this definition covers all types of merchant cash advances.
For example, in the case of some merchant cash advances, a reconciliation does not result in an adjustment of future payments, but rather involves the refund of any excess amounts collected as fixed payments when the fixed payments do not match exactly. to the percentage of the beneficiary’s actual income. sales or revenue that needed to be paid. These contracts involve a reconciliation, but do not include an adjusted payment.
Therefore, vendors using this alternate model, which is not specifically addressed, should determine if HB1027 applies.
Who should register?
HB1027 will require registration with the Commissioner of Financial Institutions for sales-based financing providers and brokers by November 1, 2022.
Under the Act, a broker is a person who, for remuneration or in the expectation of remuneration, obtains or offers to obtain financing based on the sales of a supplier for a beneficiary.
A supplier is someone who makes a specific offer of sales-based financing to a recipient. It also includes a person who solicits and makes offers of sales-based financing under an exclusive contract or arrangement with a supplier.
HB1027 has exemptions for a financial institution, vendors, and brokers with no more than five sales-based financing transactions in 12 months, and individual sales-based financing transactions over $500,000.
There is no express exception for supplier employees. If the issue is not clarified by the Commissioner, suppliers may need to consider whether the definition of supplier is broad enough to cover employees engaged in soliciting merchants, in addition to the supplier’s business registration .
Registration requires an application that will compel certain vendor and broker control persons to disclose specified judgments, orders and convictions. Virginia will also require the provider or broker to have authority to transact in Virginia and pay a fee of $1,000 (and $500 in subsequent years).
What are the disclosure requirements?
HB1027 also imposes disclosure requirements when a specific offer of sales-based financing is given to the Virginia recipient company. Unlike California and New York, Virginia will not require APR or similar rate disclosure.
However, Virginia will require disclosure of nine specific items:
- The total amount of the financing based on sales and the amount of the disbursement, if different from the amount of the financing, after deducting any fees, if any, or withheld at the time of disbursement;
- The financial burden;
- The total amount of the reimbursement, which corresponds to the amount of the disbursement plus the financial charges;
- The estimated number of payments, which is the number of payments expected, based on the projected sales volume, to equal the total refund amount;
- Payment amounts, based on projected sales volume (this requirement differs for fixed and variable payment contracts);
- A description of all other potential fees and charges not included in finance charges;
- Certain prepayment information;
- A description of collateral requirements or collateral, if any; and
- A statement of whether the supplier will pay compensation directly to a broker under the specific sales-based financing offer and the amount of compensation.
Additionally, updated information is required if the business chooses to prepay or refinance sales-based financing.
The requirement to provide a statement regarding compensation paid by a vendor to a broker is noteworthy, as the plain language is not limited to fees paid by the trader. Therefore, a provider may be required to disclose a commission paid to a broker even if that commission is not directly passed on to the recipient.
Disclosures must be provided separately from other information provided to the recipient, and the recipient must sign the disclosures at the time a specific offer is accepted.
Effective date and potential regulations
HB1027 authorizes the commission to pass appropriate regulations to implement the law. However, HB1027 applies to contracts entered into on or after July 1, 2022.
This effective date is not expressly postponed if the commission has not yet published a regulation.