Texas HB 700: 8 Ways the ACH Ban Changes Your Restructuring Leverage

What §398.056 Actually Says, and What the Headline Left Out

Every Texas owner who has read a blog post about HB 700 has been told that Texas banned ACH debits on merchant cash advances. That is not what the statute says, and if you walk into a negotiation believing it, the funder’s counsel corrects you inside two minutes and you spend the rest of the call on the back foot. The operative sentence in the enrolled bill is that a provider or broker “may not establish a mechanism for automatically debiting a recipient’s deposit account unless the provider or broker holds a validly perfected security interest in the recipient’s account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.” Automatic debiting survived. What died is automatic debiting by a funder standing behind somebody else’s lien.

That sentence created a real fight, because Article 9 treats “account” and “deposit account” as two different kinds of collateral and §398.056 uses both words in one breath. The Finance Commission of Texas resolved it toward receivables. Under 7 TAC §86.313(c), adopted June 19, 2026 and effective July 9, 2026, a provider must hold a validly perfected, first-priority security interest in all accounts receivable of the recipient before it may automatically debit a deposit account. The same rule makes a debit “automatic” when it is authorized in advance to occur more than once or on a recurring basis, which covers the ordinary daily pull and reaches prewritten checks collected at closing.

The debits are bleeding you and you want to know whether this stops them. Honestly, not on its own, because §398.102 says Chapter 398 creates no private right of action. What the chapter hands you instead is a set of facts that make your funder’s file expensive to defend at the Office of Consumer Credit Commissioner, plus a confession of judgment now worth nothing. Those are negotiating instruments, and the eight items below are ordered so you can work the checkable ones first.

1. The Statute Conditions the Debit, It Does Not Outlaw It

Notice what the prohibition attaches to. Section 398.056 regulates establishing the mechanism, not each individual pull, and the Finance Commission said so when it refused a law firm’s request to carve out manually initiated debits: if a provider obtains authorization to automatically debit your deposit account without the required security interest, the violation has already happened. The question on your file is not how often money left your account. It is whether the funder was entitled to set the arrangement up.

That reframes what you demand. You are not asking the funder to justify Tuesday’s $1,850. You are asking it to produce the security agreement authenticated under Tex. Bus. & Com. Code §9.203, the UCC-1 it filed, the date of that filing, and then to explain how the filing sits ahead of every other filing against your receivables. Most funders produce the first two documents in an hour. The third question is where the room goes quiet, especially if you were funded third or fourth in a stack.

Timing matters and nobody should oversell it. Chapter 398 took effect September 1, 2025 and the rules took effect July 9, 2026, so an advance you signed in 2023 was governed by neither at closing. The practical read is that §398.056 speaks to establishing and maintaining the debit arrangement, which is why the live question on an older file is what the funder has done since September 2025. No Texas appellate decision construes the section yet, so that is your counsel’s argument, not a settled holding.

2. First Priority in All of Your Receivables, Not Just Some

Rule 86.313(c) sets a bar that is simple to state and hard to clear: a first-priority perfected security interest in all accounts receivable of the recipient. Perfection in receivables is ordinary work, done by filing a UCC-1 under Tex. Bus. & Com. Code §9.310(a). Priority is the problem. Under §9.322(a)(1) the winner is whoever filed or perfected first, so priority was decided before your third funder ever wired money. If a 2021 equipment lender or an earlier advance holds a live blanket receivables filing, today’s funder is second by operation of law and cannot fix that by wanting to.

An industry association asked the commission to narrow the rule so a funder needed first priority only in the specific stream of receivables tied to its own deal. The commission refused, and explained that allowing it would let a provider designate a new stream at closing, take a first lien on that carve-out, and satisfy the rule while sitting behind everyone else on the rest of your book. A narrow collateral description is not an answer. The funder has to be first on everything.

There is a jurisdictional wrinkle worth raising because commenters raised it. Factoring companies asked the commission to require the UCC-1 to be filed in Texas, describing an abuse where a provider files in New York against a Texas business and then claims that supports its debit arrangement. The commission declined, not because the abuse is imaginary but because which state’s law governs perfection turns on the debtor’s location and collateral type under §§9.301, 9.305 and 9.307. So it is a fact question, and a fair one to put in writing.

3. Why the Deposit-Account Reading Is Worse for Funders

Some lawyers read §398.056 the other way, on the theory that a section captioned “certain automatic debits prohibited” and triggered by debiting a deposit account probably meant the security interest to be in that same deposit account. The reading is not crazy, and it is worth understanding because it is far more hostile to funders than the receivables reading the rule adopted. A security interest in a deposit account as original collateral cannot be perfected by filing at all. Under U.C.C. §9-312(b)(1) it may be perfected only by control.

Control has a short definition and a hard one. Under §9-104(a) a secured party has control if it is the bank where the account is maintained, if the debtor, the secured party and the bank have signed a record obligating the bank to follow the secured party’s instructions without further consent from the debtor, or if the secured party becomes the bank’s customer on the account. Your funder is not your bank, has not signed a three-party control agreement with it, and has not become its customer. Priority compounds it: U.C.C. §9-327(3) ranks the bank holding the account ahead of another secured party.

Holding both readings matters because they arrive at the same place from different directions. Under the rule, the funder must be first on your entire receivables book, which a stacked merchant’s later funders never are. Under the alternative reading, the funder needs a control agreement with your bank, which essentially no non-bank funder has. Your counsel does not have to win the interpretive fight to make the compliance question uncomfortable, and that asymmetry is the leverage.

4. A Debit That Fails the Test Becomes an Abusive Practice

This is where a compliance gap becomes something a regulator can act on. Rule 86.312(b) lists the acts identified as unlawful, unfair, deceptive or abusive under §398.005, and item (6) is an automatic debit in violation of §398.056. Item (5) is a confession of judgment violating §398.055. Item (4) is failure to make accurate disclosures. Item (10) is debiting an account or deposit account without authorization, and item (15) is any device or subterfuge to evade the requirements. One noncompliant arrangement therefore tags two violations, the statutory one and the practice one.

The rule also closes the workarounds a funder reaches for first. Under 86.313(e) a provider may not accept payment of a violating debit and may not direct a third party to complete one, which is aimed at servicing shops and processors that run the pulls on a funder’s behalf. Under 86.313(b) the prewritten-check trick counts too, because the commission kept that sentence over objection precisely to stop a provider from collecting postdated checks and calling the arrangement manual.

Be clear-eyed about the limits. A violation does not automatically void your agreement, does not automatically refund debits already taken, and does not give you permission to stop paying. If you unilaterally revoke the ACH authorization at your bank, you have almost certainly triggered an event of default, and the funder’s next moves are a suit, a lien notification to your customers, and a demand on your personal guaranty. That call belongs to counsel who has read your contract.

5. Your Confession of Judgment Is Void, Full Stop

Section 398.055 is one sentence and the cleanest thing in the chapter: a commercial sales-based financing contract that contains a confession of judgment provision or any similar provision is void and unenforceable. Notice what the legislature did not write. It did not say the provision is void. It said the contract containing one is void and unenforceable. That is aggressive drafting, no Texas court has told us how far it reaches, and the responsible move is to flag it as an argument of real weight rather than a decided rule.

Either way the effect on a funder’s playbook is immediate. A confession of judgment exists so a funder can convert a default into an entered judgment without proving a breach, then move to enforcement while you are still finding a lawyer. Strip it out and the funder is back to filing a petition, serving you, and litigating a contested case in which recharacterization, reconciliation and disclosure defenses all get raised. That is months of calendar against a business that may not pay in the end anyway.

The “or any similar provision” language is what to hunt for in your paperwork, because the clause is rarely labeled honestly. Look for a power of attorney letting the funder sign in your name, a stipulation that a sworn affidavit from the funder’s officer is conclusive proof of the balance, a waiver of notice and hearing before entry of judgment, or a consent to judgment on affidavit. Our walkthrough of the clauses that decide your leverage reads them next to the rest of the agreement.

6. Registration Status, and the Date That Actually Bites

Section 398.053(a) says a person may not engage in business as a provider or a commercial sales-based financing broker for compensation in Texas unless, before conducting business, the person registers with the Office of Consumer Credit Commissioner. Renewals fall on or before January 31 each year under §398.053(b), and §398.054 requires a registrant to update its registration statement within 90 days of any change. Registration is not a license and carries no examination schedule, but it puts the funder inside a system that can suspend or terminate it.

Now the date everybody misreads. Section 2(a) of HB 700 gives the December 31, 2026 deadline only to a person already engaging in the business on the effective date. A funder that opened after September 1, 2025 got no grace period; §398.053(a) required it to register before conducting business. So “unregistered” means very different things depending on when your funder started, and the answer usually sits in its own Secretary of State filing history and its website copy.

Checking is straightforward. Registrations are filed through the Nationwide Multistate Licensing System under rule 86.303, and the OCCC publishes a searchable list of what it licenses and registers, so start with that search and its licensing line at 512-936-7605. One caveat, because it cuts against the aggressive version of the argument: the fee rule and registration form only took effect July 9, 2026, so a funder that opened in late 2025 faced a duty with no working process, and no published OCCC order has addressed the gap.

7. The Sub $1,000,000 Disclosure Duty and the Gaps in It

Section 398.051(a) attaches when a provider extends a specific offer of commercial sales-based financing of less than $1,000,000 in Texas, and it requires eleven items: total financing amount, disbursement amount, finance charge, total repayment amount, the estimated period for periodic payments to equal that total, the payment amounts and frequency (or a schedule plus an average projected monthly payment if variable), all other potential fees including draw, late and returned-payment fees, any finance charge and any additional fees triggered by early payoff, a description of collateral requirements or security interests, and whether the provider pays your broker and how much.

Two more requirements produce checkable defects. Section 398.051(b) says that if the provider conditioned the deal on paying off an existing advance, it had to disclose how much new money went to prepayment charges and to unforgiven interest or finance charges on the old deal, plus the actual dollar reduction in your disbursement. Section 398.052 required your signature on the disclosures before the application was finalized. Rule 86.310 adds that they must be in writing at or before the specific offer, must accurately reflect it, and must be corrected promptly once the provider learns otherwise.

Rule 86.310(d) is the ninety-second check, because it is either there or it isn’t. Every Chapter 398 contract must carry a separate, conspicuous notice saying the OCCC enforces certain laws applying to the contract, with the agency’s address, phone number and website. If your post-July 9 Texas agreement has no OCCC notice block, you have found a rule violation without hiring an expert. On an older advance the same reading still pays, and our reconciliation challenge walkthrough shows what else to pull.

8. $10,000 a Violation, and the Lawsuit You Do Not Get

Section 398.101 sets a civil penalty of $10,000 for each violation, and rule 86.321(c) confirms that figure as the administrative maximum. Run it against how a funder operates. A provider running noncompliant debit arrangements across a Texas book is not looking at one violation but at a per-contract count, and those contracts probably share the same signature page, authorization form and missing priority analysis. That arithmetic is what makes a general counsel want your file closed quietly.

Now the limit, straight, because you deserve the real picture. Section 398.102 says the chapter does not create a private right of action against any person based on compliance or noncompliance. You cannot sue your funder for a Chapter 398 violation and collect that $10,000, and neither can your lawyer. The penalty is the OCCC’s to assess. Your routes are a complaint to the OCCC, which takes them at 800-538-1579 and through its complaint process, the same facts used defensively if the funder sues, and the same facts used as pressure in a negotiated resolution.

So the sequence for a Texas business this week is unglamorous. Pull every agreement, authorization and addendum you signed. Pull your UCC-1 filings and date-order them. Check the funder’s registration status and when it started doing business here. Read the contract for a confession of judgment or a power of attorney acting like one, and for the OCCC notice block. Then get the package in front of someone who negotiates these for a living before you change how money moves out of your account.

The Provision Nobody Wrote About: §398.004 and the Purchase Label

For years the first line of every Texas funder’s usury defense was Tex. Fin. Code §306.103. Subsection (a) says the amount of a discount in or charged under an account purchase transaction is not interest. Subsection (b) goes further, making the parties’ own characterization of the deal as a purchase conclusive, for purposes of that chapter, that it is not a transaction for the use, forbearance or detention of money. If the paper said “purchase of future receivables,” the label did the work and the rate discussion never started.

HB 700 stopped that with a sentence most summaries skipped. Section 398.004 provides that a sales-based financing transaction is not a form of an account purchase transaction for purposes of §306.103, regardless of the principal amount of the advance. The label is no longer conclusive of anything for a transaction meeting the sales-based definition, which under §398.001(8) covers both the true percentage-of-revenue deal and the fixed-payment deal carrying a reconciliation process. That is most of the market.

What it is worth depends on your file, with two caveats. Section 398.004 removes a defense; it does not declare your advance usurious, and Texas usury liability under chapter 305 is measured as three times the amount you get by subtracting the interest the law allowed from the interest contracted for, charged or received, which is a computation rather than a slogan. And we could not locate a published Texas decision construing §398.004 as of July 2026, so frame it to a funder as a strong argument on fresh text.

Who Should You Call? Our Top-Rated Business Debt Firms

One firm on this list works the entire lifecycle of a business debt file, from stopping the daily debits through attorney-led negotiation, UCC lien removal, and a signed release. The other two cover broader debt categories that often sit alongside the advances. Choose accordingly.