Several states have implemented or considered commercial financing disclosure regulations in recent years. Initially focused on revenue-based financing options like Merchant Cash Advance (MCA), these regulations have broadly captured commercial finance, creating a patchwork of differing requirements that burden providers, including those in equipment finance. This situation has prompted calls for a uniform approach that balances small business protections with market efficiency.
The Equipment Leasing and Finance Association has been actively engaged as an observer in the Uniform Law Commission's (ULC) discussions on a potential uniform commercial financing disclosure law. This process aims to create a uniform law that would provide transparency to small businesses in their financing decisions while maintaining a fair and efficient market.
Differentiating Products for Fair Disclosure
At the heart of the debate lies a crucial issue: not all commercial financing products are created equal. Much of the current regulatory conversation has focused on products like MCAs, factoring, and other revenue-based financing arrangements. These products, designed to provide quick capital for businesses facing cash flow challenges, differ significantly from equipment finance transactions, which typically support businesses in strategic growth phases.
Equipment finance transactions are commonly made when a business is expanding, purchasing equipment to enhance production capacity, and usually not in response to financial distress. For instance, a restaurant purchasing a new oven to accommodate growing customer demand or a manufacturing company acquiring a forklift to boost operations reflects a planned investment for growth. These transactions are fundamentally different from emergency or working capital financing needs.
ELFA's Revised Approach
After taking the last five years of activity in this space into account, going forward ELFA believes that the ULC should narrowly target its uniform law to capture specific financial products of concern, not the entire market. To do otherwise threatens enactability across a broad set of states and creates a regulatory structure where costs outweigh benefits in many cases.
We are proposing that the ULC pursue a strategy specifically addressing revenue-based financing and factoring without covering loans generally. This approach eliminates the need for the "ELFA suite of exemptions" and prevents the need for continuous defense of these exemptions in every state.
It should be noted though that the ULC process is down the road a bit, and we might not prevail. Accordingly, as a hedge, we're also providing options to exempt most equipment finance transactions should the ULC pursue broader legislation. This approach would exempt banks, captives, leases under UCC 2(A), and purchase money obligations under Article 9 of the UCC.
Our position stems from the belief that regulation should be tailored to solve the problems that have presented themselves. While transparency is important, it shouldn't stifle diverse financing options that drive business growth. By advocating for a targeted approach, we aim to ensure the uniform law benefits all stakeholders in the commercial finance ecosystem.
Stay tuned for updates as we work toward a uniform law that provides clarity for small businesses without imposing unnecessary burdens on the equipment finance industry.