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On June 16, Vermont enacted H. 648, a licensing and regulatory framework for providers of merchant cash advances, revenue-based financing, and factoring transactions.Effective July 1, 2027, the new law requires covered providers to obtain licenses from the Department of Financial Regulation and comply with new disclosure and operational requirements.
The legislation applies to providers of sales-based financing and factoring transactions, while exempting depository institutions, governmental entities, seller financing, and certain transactions of $1 million or more that are not primarily for personal, family or household use. In addition to creating new licensing requirements, the law regulates contract terms, requires standardized disclosures, and authorizes the Commissioner to adopt implementing regulations before the law takes effect.Specifically, the bill:
- Requires licenses for providers and brokers. Providers offering merchant cash advances, revenue-based financing, and factoring transactions generally must obtain a Vermont lender license before offering covered products in the state. Companies that solicit recipients or present offers on behalf of third parties generally must obtain a loan solicitation license unless an exemption applies.
- Requires standardized commercial financing disclosures. Before consummating a sales-based financing or factoring transaction, providers must disclose the finance charge, estimated APR, total repayment amount, payment terms, fees, collateral requirements, and certain refinancing information. Recipients must acknowledge these disclosures before the transaction is finalized.
- Restricts certain financing contract provisions. The law prohibits confessions of judgment, limits out-of-state choice-of-law and venue provisions, regulates arbitration clauses, and generally prohibits automatic debits from a recipient's deposit account unless the provider holds a properly perfected first-priority security interest.
- Creates remedies for licensing violations. A knowing and willful violation of the licensing requirements may be void commercial agreements, preventing providers from collecting payments, receivables, or charges. In other circumstances, providers may recover only the amount disbursed to the recipient, without finance charges or other amounts.
Putting It Into Practice: Vermont joins a growing number of states regulating commercial financing transactions (previously discussed here and here). As states continue to impose licensing, disclosure, and other operational requirements on merchant cash advances, revenue-based financing, and factoring transactions, providers operating nationwide should review whether their products trigger state licensing obligations and update disclosure forms, financing agreements, and compliance procedures accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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