New Business Loan Disclosure Requirements
Commercial finance disclosure laws now require APR and total cost disclosure for small business financing. Here is what you are entitled to know.
What Lenders Are Required to Disclose
In states with commercial finance disclosure laws (currently including California, New York, Virginia, Utah, and several others), lenders offering business financing under $500,000 must provide a standardized disclosure document before the borrower signs. This document must include the total disbursement amount, the total repayment amount, the total dollar cost of financing, the APR (Annual Percentage Rate), the payment schedule, and any prepayment penalties. The APR requirement is the most significant. It forces lenders offering factor-rate products — MCAs, RBF agreements — to calculate and disclose an APR equivalent that can be compared directly to interest-rate products. This standardization makes comparison-shopping meaningfully more effective.
What APRs on Alternative Products Actually Reveal
The disclosure of APR on MCA and RBF products frequently surprises borrowers who were focused on the factor rate. A 1.25 factor rate on a 12-month MCA translates to approximately 50% APR. On a 6-month MCA with the same factor rate, the APR is approximately 100%. These numbers are accurate representations of the annualized cost of capital — they are not inflated or misleading. This does not mean these products are inappropriate — it means you are now equipped to evaluate them with accurate information. A business accessing $100,000 for six months at 100% APR is paying $25,000 for that capital. Whether that is justified depends entirely on what the $100,000 enables the business to do in those six months.
Broker Compensation Disclosures
In addition to lender cost disclosures, some states now require commercial finance brokers to disclose their compensation — how much they earn from placing your financing. This is significant because broker compensation is paid by the lender, not the borrower, but it affects the pricing of your deal: higher broker commissions typically translate to higher borrower costs. As a borrower, you can ask any broker upfront to disclose their compensation. A reputable broker will answer directly. If they deflect or are evasive about how they are compensated, that is a meaningful signal about their alignment with your interests.
How to Use Disclosures Effectively
Receive your disclosure documents and actually read them before signing. Focus first on the total repayment amount — this is the unambiguous number showing what you pay back in total. Then look at the APR to understand the annualized cost. Finally, review the payment schedule to ensure you understand the payment frequency, amount, and mechanism (daily debit, weekly ACH, percentage holdback). Create a comparison table for any deals you are considering: amount received, total repayment, dollar cost, APR, term, and payment amount. Rank by APR and total cost. Then apply any qualitative considerations — speed of funding, relationship value, flexibility — to make your final decision.
What If Your State Is Not Covered
If you are in a state without commercial finance disclosure requirements, you still have the right to request the same information — lenders simply are not legally required to provide it proactively. Ask every lender you engage with to provide the estimated APR and total repayment amount in writing before you sign. Any legitimate lender will comply. Those who decline or are unable to provide this basic information should be viewed with significant skepticism.
