Texas passed the most consequential state-level merchant cash advance legislation in the country in 2025, and most business owners facing MCA obligations do not know it exists.
Governor Greg Abbott signed HB 700 on June 20, 2025, adding Chapter 398 to the Texas Finance Code. The statute took effect September 1, 2025. It changes the legal terrain for MCA enforcement in ways that alter available defenses, shift negotiating leverage, and create new enforcement mechanisms that business owners can invoke against funders who violate its terms.
The Confession of Judgment Prohibition
HB 700 voids confession of judgment provisions in commercial sales-based financing contracts. This is not a disclosure requirement or a procedural rule. It is a substantive prohibition that renders the COJ clause unenforceable regardless of what the contract says. A funder who obtained a Texas business owner’s signature on an agreement containing a COJ clause no longer holds a valid enforcement tool under that clause.
The practical consequence is that funders seeking to collect against Texas businesses must now proceed through regular litigation, with notice, service of process, and the opportunity to defend. That requirement does not prevent collection. It does prevent the silent, no-notice judgment entry that has historically been the MCA industry’s primary enforcement mechanism against small businesses.
Automatic Debit Restrictions
The new law prohibits MCA providers from establishing automatic debit mechanisms against a recipient’s deposit account unless the provider holds a perfected first-lien security interest in that account. This restriction matters because most MCA agreements establish daily ACH debits from the business’s primary operating account, and most funders do not hold the first-lien position the statute now requires.
A funder debiting a Texas business account without the required security interest after September 1, 2025, is operating outside the statute. That violation is enforceable by the Office of Consumer Credit Commissioner and creates the basis for a business owner to demand cessation and, potentially, restitution.
The automatic debit was the MCA industry’s functional enforcement tool. Texas has regulated it directly.
Mandatory Disclosures
The disclosure framework under Chapter 398 requires that business owners receive specific cost-of-financing disclosures before entering an MCA agreement. These disclosures must express the total cost in terms that permit comparison across financing products. A funder who fails to provide the required disclosures at origination has violated the statute, and that violation is relevant to the enforceability of the underlying agreement.
Many existing MCA agreements, executed before September 2025, were originated without disclosures that would now be required. While the statute does not apply retroactively to pre-effective-date agreements, the disclosure requirement establishes a new baseline against which funder conduct in current and future transactions will be measured.
Usury Law Exposure
HB 700 removed the “account purchase transaction” exemption that MCA funders had relied on to avoid Texas usury law. The precise scope of that removal is still being interpreted by the Office of Consumer Credit Commissioner as it develops implementing rules, but the direction is clear: the exemption that let MCA funders characterize their products as purchases rather than loans for usury-law purposes is no longer available under Texas law.
Texas usury law caps interest at 18 percent annually for most commercial transactions. If a court or regulator determines that an MCA agreement exceeds that cap after the account-purchase exemption no longer applies, the agreement is usurious. The consequences of a usurious contract under Texas law include forfeiture of the interest and, in some cases, twice the amount of usurious interest as a penalty to the borrower.
DTPA Foundations
The Texas Deceptive Trade Practices Act provides a separate avenue for business owners who were subjected to misrepresentations during MCA origination. Misrepresentations about the effective cost of the advance, the nature of the reconciliation clause, or the funder’s ability to modify the daily debit in response to revenue declines may meet the DTPA’s false, misleading, or deceptive acts elements.
DTPA claims can be pursued alongside or independent of usury claims. They carry attorney’s fee provisions that shift litigation costs to the funder if the business owner prevails, which makes them meaningful leverage in settlement discussions even if the case never reaches trial.
One qualification worth noting: DTPA protections apply most clearly to consumers and to businesses that qualify as “consumers” under the statute’s definition. The applicability to larger commercial borrowers is less settled, and an attorney assessment of whether the DTPA framework applies to a specific transaction is necessary before relying on it as a primary defense.
