By Ken Greene
As many of you know, sales-based financing, colloquially known as merchant cash advance (MCA) financing, is a commercial transaction in which a business is paid a lump sum of cash up front in exchange for a percentage of the business’s future sales or revenue. The MCA defies categorization in many ways. To some, it may seem like a creative form of loan. To others, it is a sale and purchase of assets. This distinction goes beyond splitting hairs. It has important ramifications in states that regulate lending. In particular, in a state like California, which requires licensure for lenders, the difference is critical.
The California Financing Law (CFL) does not contain language which requires that MCA providers be licensed. Some attorneys nonetheless recommend that those providers apply for licenses. Historically, I have not agreed with them. Being a licensee requires a substantial commitment of resources. The application is lengthy, time-consuming and can be expensive to pursue. Licensing comes with obligations, such as restrictions on the lenders and brokers with whom you are permitted to work. The annual reports are cumbersome, and the penalties for failure to file annual reports are severe.
Even without licensing requirements, many states are slowly but surely encroaching on the free hand MCA providers once enjoyed. Irrespective of whether an MCA provider is licensed in California, it must comply with the state’s disclosure rules. The same is true in New York. Utah and Virginia not only require that MCA providers comply with their disclosure laws but require that such providers be licensed.
The bottom line is that this form of alternative financing is receiving much closer scrutiny on the state as well as federal level, by the courts and the legislatures, than ever before. Two recent developments highlight this shift. On April 11, 2025, North Dakota passed House Bill 1127 (Money Brokers Act). The new law requires licensing and places a cap on fees. On June 21, 2025, Texas jumped on the bandwagon, passing a law which prohibits an MCA provider from automatically debiting any merchant in the state unless they have a first position MCA. The new Texas Law also requires disclosures and registration with the state. That means a minimum of 12% of the states in this country are directly regulating MCA providers. This number will almost certainly grow.
The most interesting aspect of the North Dakota law is that it allows the state to designate any financial product as a loan. If other states follow suit, the consequences, including licensing, registration, application of usury laws, greater oversight and other restrictions, will no doubt rock the boat of the MCA provider industry. I am reconsidering my position as to the wisdom of preemptive applying for a CFL license in California.
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NORTH DAKOTA HOUSE BILL 1127: https://www.sos.nd.gov/sites/www/files/documents/services/leg-bills/2025-69/house-bills/1127.pdf
TEXAS HOUSE BILL 700: https://capitol.texas.gov/tlodocs/89R/billtext/pdf/HB00700F.pdf#navpanes=0
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Editor’s Note: This article originally appeared in Leasing News and is reprinted with permission.
Ken Greene is an attorney at his SoCal firm, the Law Office of Kenneth Charles Greene. He began his career with BankAmerilease in 1981 and has been a partner in several firms, including Ross & Ivanjack, one of the first law firms devoted exclusively to the equipment finance industry. He continues representation of lenders, lessors and brokers in contract preparation, compliance, licensing, litigation and transactions. Greene is presently General Counsel to the AACFB, has served twice on the BOD of NEFA and was its Legal Committee Chairman, Legal Line Editor, Regional Committee Chair and Conference Chairman. He was Leasing News Legal Editor since early 2022. Greene received his BA from Brandeis University and his JD from Santa Clara University School of Law. He is frequent writer and speaker on matters of leasing law. Greene’s passions are family, music, travel and more. In his “spare” time, he plays and records with several bands and produces concerts and charity events.
