Commercial financing disclosure laws, what your funder must show you.

What is a commercial financing disclosure?

For decades, consumer credit has come with standardized disclosures so people can compare offers. Business financing mostly didn't. A business owner comparing a merchant cash advance, a factoring agreement and a term loan had to work out the true cost of each from contracts written in different terms.

Commercial financing disclosure laws close part of that gap. They require providers of certain types of business financing, often including merchant cash advances, to present the key cost figures in a set format, usually at the time of the offer or before the business signs. The point is comparison: the same figures, calculated the same way, across different providers and products.

What does a commercial financing disclosure show?

The exact contents vary by state, but disclosures commonly include:

• The total amount of funding provided, and sometimes the amount actually disbursed after any deductions.
• The total cost of the financing, often called the finance charge: the dollar difference between what you receive and what you deliver.
• An estimated APR or an estimated term, depending on the state.
• Payment details: the amount, frequency and method, and for a merchant cash advance, how payments relate to your sales.
• Prepayment terms: whether paying early carries any charge, or any discount or reduction in cost.
• A description of how figures were estimated, since a merchant cash advance has no fixed term.

Which states require commercial financing disclosures?

Several states now require them, and the list is growing.

• California was among the first. Its law covers commercial financing of $500,000 or less, and its disclosures require an estimated APR, among other figures.
• States including Georgia, Florida, Kansas and Missouri have adopted their own disclosure requirements.
• Other states have passed or are considering similar laws.

The rules are not uniform. States differ on which transactions are covered, the size of deals included, whether an estimated APR is required, how figures are calculated and how the disclosure is delivered. A disclosure from one state can look quite different from another's.

How estimated APR works on a merchant cash advance

A merchant cash advance has no interest rate and no fixed repayment date. Its cost is set by a factor rate, and how long delivery takes depends on your sales. So an APR on an MCA disclosure is necessarily an estimate, based on an estimated term, usually derived from your historical revenue and the agreed payment.

Two things follow. First, if your sales run slower than estimated, delivery takes longer and the effective annual figure falls, because the dollar cost doesn't change. If sales run faster, it rises. Second, short terms produce high annualized figures even when the dollar cost is moderate, because a fixed cost spread over a few months looks large when expressed per year. The estimated APR is a useful comparison tool, but read it alongside the dollar cost and the payment.

What a disclosure doesn't tell you

A disclosure is a summary of cost, and a useful one. It isn't a full picture of whether an advance is right for your business. It won't tell you:

• Whether the payment fits your cash flow once it's added to any advances you already have. See positions and stacking.
• How reconciliation works if your sales drop, which is set out in the agreement. See MCA reconciliation.
• What the agreement treats as a default, and what fees apply to returned payments.
• Whether the capital will earn back its cost. Only your plan for the money can answer that.

Use the disclosure to compare cost, and the agreement and your own numbers to judge everything else.

How InstaFunders handles state disclosures

InstaFunders provides the disclosures a merchant's state requires. The numbers in your disclosure should line up with your offer: the funded amount, the purchased amount (your hard stop number), the payment and frequency. If something doesn't match, ask before you sign.

We fund businesses across the US, except businesses located in Utah, New York and Connecticut. You can check the rest of the requirements before you apply.

How to use a disclosure to compare offers

1. Start with dollars. Compare the amount you'll actually receive and the total cost.
2. Check the payment. A lower cost is no help if the payment doesn't fit your cash flow. See how MCA payments work.
3. Use estimated APR to compare like with like. It's most useful for comparing offers with similar estimated terms, or an advance against a different kind of financing.
4. Read the prepayment section. It tells you whether paying early changes the cost; see paying off an MCA early.
5. Read the agreement too. A disclosure summarizes; it doesn't replace the contract. Our guide to reading an MCA offer covers the rest.

Frequently asked questions