A brief by Meredith Chaiken, Esq.
HB 700 [2025] was enacted into law in May of 2025 (effective as of 9/1/25) and is now part of Texas Statutes Chapter 398 [in other words, it is no longer a “bill” because it was passed and signed into law. Once a bill is passed/enacted, you then refer to the newly enacted statute, not the bill].
These are the most pertinent recently enacted sections of Chapter 398 of the Texas Statutes that came out of HB 700:
Sec. 398.055. UNENFORCEABILITY OF CERTAIN CONTRACT PROVISIONS. A commercial sales-based financing contract that contains a confession of judgment provision or any similar provision is void and unenforceable.
Added by Acts 2025, 89th Leg., R.S., Ch. 723 (H.B. 700), Sec. 1, eff. September 1, 2025.
Sec. 398.056. CERTAIN AUTOMATIC DEBITS PROHIBITED. A provider or commercial sales-based financing broker may not establish a mechanism for automatically debiting a recipient’s deposit account unless the provider or broker holds a validly perfected first-position security interest in the recipient’s account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.
SUMMARY
The MCA industry’s concern with this new law is the requirement that automatic debits on the underlying businesses’ accounts be utilized only by a revenue-based financing (RBF) provider that is in a first-lien position on the underlying business, which was an amendment added last minute on the Senate floor. Sen. Perry noted that the purpose of his amendment was to ensure that RBF companies [aka MCA lenders] “are known” to other financing providers. The Texas Senate passed the legislation as amended on May 26, 2025, and the Texas House concurred in the Senate amended version on May 28, 2025. This provision requires RBF providers to obtain a validly perfected, first-priority security interest in a recipient’s account in order to ACH debit a Texas business’ bank account and largely prohibits a Texas business from choosing to have payments to RBF providers automatically debited from its business bank account.
The consensus view appears to be that this provision will serve as a de facto ban on RBF transactions (including MCAs) in Texas for multiple reasons, absent significant modifications to the structure and repayment terms and conditions of these transactions. These reasons include the following:
- The standard industry practice is for lenders to issue blanket liens across “all assets,” which means that many small businesses do not have invoices to factor or collateral to pledge for a loan but still have prior liens on their accounts.
- Chaiken 3.25.25
- There are numerous stale Uniform Commercial Code (UCC)-1 filings on Texas small businesses because there is no legal obligation to remove a lien once the debt is paid in full.
- RBF providers could inadvertently trigger penalties under this law because UCC searches do not always catch filings.
- The IRS, along with state and local tax authorities, could have a first priority lien without filing a UCC-1.
- Most businesses (like most consumers) need access to multiple types of financing.
Notably, the scope and coverage of the law are not contingent on whether the provider conducting the debiting is located out of state. Rather, the trigger is simply if the merchant is located in Texas.
Read full story here: http://debanked.com/2025/05/texas-passes-law-limiting-sales-based-financing-to-1st-positions-only-and-more/