WHAT LAWS APPLY TO A MERCHANT CASH ADVANCE IN TEXAS?

Texas governs Merchant Cash Advances through Texas House Bill 700 (HB 700). HB 700 took effect on September 1^st of 2025.

WHAT LAWS AND PROTECTIONS EXIST IN HB 700 FOR MERCHANTS?

HB 700 drastically increases the regulation of Texas “commercial revenue-based financing”. More importantly HB 700 treats a Merchant Cash Advance as commercial revenue-based financing. Therefore, the following list of changes directly effect Texas Merchant Cash Advances.

1. Registration Requirement: 

All funders and brokers of a merchant cash advance must be registered with the Texas Office of Consumer Credit Commissioner (OCCC) by December 31, 2026.

2. Automatic Debit / ACH Prohibition: 

Funders and brokers of merchant cash advances are forbidden from automatically debiting (ACH) a merchant’s bank account unless they hold a perfected (legally sufficient), first-priority (first in line) security interest (promise and guarantee) in that bank account as per Chapter 9 of the Texas Business & Commerce Code.

It is not easy for an MCA funder to obtain a perfected first priority security interest. Even if they do, the law requires they be first in line. However, most businesses already have perfected and or secured debt that trumps a merchant cash advance, for example a mortgage, a traditional loan, perhaps an SBA loan and or a factor. In each scenario the secured creditor not the MCA funder is legally “first in line.”

This raises a question, “is a merchant permitted to stop paying their MCA’s if they have a creditor in front of all the MCA’s? More likely than not a Court would require a merchant to keep paying the funder. Funders will work around the prohibition against ACH by demanding wires instead of direct debit.

Notwithstanding this, Texas HB 700 brings much more protection to a merchant’s bank account versus what existed prior to this law passing. Interestingly, the law applies in equal measure to a Merchant if they allow an MCA funder to ACH. The laws scope is about whether the Merchant is a resident of Texas, if yes, the law applies.  

3. Confession of Judgment Ban: 

Any clause referencing a Confession of Judgment in a Texas Merchant Cash Advance Agreement is strictly illegal and unenforceable. A Texas Confession of Judgment is a clause, often inserted in MCA Agreements, that permits an MCA Funder to obtain a judgment against a Merchant without a trial. Now, a COJ clause is void and completely unenforceable.

4. Comprehensive Disclosures: 

For merchant cash advance agreements with a total payback of less than one-million ($1M,) an MCA funder must provide the merchant with certain disclosures. The disclosures must be in writing and signed by the merchant to be valid: These disclosures include:  

1. • The total cost of financing must be disclosed.
   • The total disbursement amounts must be disclosed.
   • The total repayment amount and payment schedule must be disclosed.
   • The total amount of compensation paid to the broker must be disclosed.