Buoy Capital Blog

States are rapidly passing laws to try and make business lending more transparent for borrowers and most of these laws have a lot of teeth in them. Of course California and New York are leading the way, but others are quickly following suit. Utah and Virginia have recently passed laws and laws are pending in 6 other states. Most are similar in nature, but some (like Utah) have broker registration requirements as well once you close so many loans with state domiciled businesses.

In California, there are very strict guidelines on disclosures that went into effect last December (2022). These must be provided whenever a lender or broker makes or modifies any type of written offer (text, email, letter, etc.). There has to be acknowledgement of some type that it was received by the prospective borrower. Any verbal back and forth is okay, but woe to you if you pass something along in writing without the accompanying disclosure, like APR, fees, brokerage commissions, etc. There are even strict guidelines as to the type of font you have to use on the forms. MCAs are also covered, which is probably news to most players in that industry. Commercial real estate loans are expressly exempt.

There are nasty criminal fines and jail time in CA threatened if you knowingly break the law. Also civil penalties are spelled out and allowances for the borrower to sue the broker and/or lender. There is also a provision that both lenders and borrowers have to keep these disclosures on file for 4 years, whether the borrower moved forth on the loan or not.

A number of lenders are putting in place procedures that state all offers to prospective borrowers have to come from them directly via DocuSign. By simply opening the disclosure document electronically, the borrower is giving tacit knowledge of receipt. The broker receives a copy of the offer and disclosures, but the sales process is totally different. It would seem to me that all these interim disclosures should serve to make the actual closing process smoother as all uncertainty on the borrower’s part has been removed.

Bottomline, brokers and lenders need to be aware of licensing requirements in place in each state. For borrowers, this is a great tool to bring transparency to the entire process. One thing that comes to mind is how awful a lot of the MCA disclosures are going to look.

I get asked this question a lot:  What is the difference between a line of credit and a revolving line of credit?   They are very similar, but there is one big difference from a lifespan standpoint. 

If you arrange a line of credit with a lender, it’s a one time arrangement for a specific period of time.  Once you pay it off, it’s over.  A revolving line of credit, on the other hand, stays open until one party or the other deems it over.  In both cases, you are provided funds up to a certain credit limit and you can use and pay back those funds at your discretion.  You have a lot of flexibility in either case, but a revolving line allows you to borrow and repay the monies over and over again, up to a certain limit.

In any case, the amount of credit line a lender will grant you will depend upon your credit score, income and credit history.  Most businesses use a line of credit to finance expansion, but my philosophy is to not wait until you need it.  Arrange a line of credit when times are good (and you quality for the largest amount), draw down the minimum amount to keep it active and have the comfort of knowing it’s there if and when the time arises that you really need it.