Advantages of Conducting Business Under Texas Law for Merchant Banking and Factoring Companies

Mar 28, 2024Supply Chain Chronicles

Anyone in the Factoring and merchant banking trades knows that these transactions can encounter real challenges almost everywhere in the US, as many state laws and governments are unfriendly to these industries.

EXCEPT… In the very few states where the practice is protected – ONE in particular. More on this below.

As a merchant bank or factoring company, the legalities in many states can disrupt and even obliterate your agreements with companies who want to maintain cashflow, while moving product. And they’re often able to do this despite CLEAR AND EMPHATIC CONTRACT LANGUAGE put in place to specifically prevent it.

How?

In the event of a dispute, bankruptcy, or other hiccup in the course of dealings, many state statutes per se re-classify your factoring arrangement as a LOAN, diverting it into a legal obstacle course. You could then be categorized as a creditor and accounts receivables labeled as collateral instead of your rightful property. You can also become subject to usury ceilings, and collection could be frozen altogether.

These laws have essentially rendered the factoring and merchant banking trades an uphill battle in most jurisdictions.

Now, that’s enough bad news. There is a way to escape this trap.

How? Think: Citibank in the 1980s. Sound like an obscure reference? Keep reading.

While doing business in New York, the global financial hub where you’re likely operating (but should you be?), they were being squeezed between high market interest rates and a state-mandated cap on the interest rates they could charge their credit card holders.

So, what did they do? They simply transplanted their dealings to a place that didn’t have those caps! This landed them in South Dakota, and the rest, as they say, is history. They effectively saved their business, many others in the industry followed them there, and the banking and credit industries were revolutionized. All thanks to a simple RELOCATION.

But where could there possibly be such a Promised Land for merchant banking and factoring?

The Lone Star State

That’s right, Texas. This famously business-friendly state takes a unique approach to such financial arrangements, in that it has a multilayered statutory apparatus in place especially geared toward protecting factoring deals from the aforementioned re-classification nightmare.

As we all know; in finance, you live by the language in your documentation, and in Texas, it will be honored. Your agreement says what it says, and a Texas judge is very unlikely to look beyond the wording of your agreements to interpret and define them. If it says it’s NOT A LOAN, then it’s not.

It’s all there in black and white…

So, there you have it. If you’re a factoring or merchant banking enterprise, the ideal setting is Texas. Or you should at least be pointing to their statutes.

You might be thinking “Does this mean I have to suddenly pick up my whole operation, and life, and move it all to Texas?”

Not necessarily (though it may not be a bad idea). To invoke Texas law in these matters, what you need is a reasonable connection to the state, and preferably be able to pass the “substantial nexus” test.

Not sure what that requires, or how to go about it?

Let Commerce Law Partners walk you through connecting those dots and get your transactions on the best footing possible.

Contact Commerce Law Partners today and Prepare to Win.

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