Texas Enacts Strict Regulation on Automatic Merchant Debiting
On June 21, 2025, Texas Governor Greg Abbott enacted House Bill 700, a new law that significantly limits the ability of financing providers to automatically withdraw funds from merchants’ accounts. Under this legislation, only entities holding a fully perfected first-priority security interest—above all other claims—are permitted to set up automatic debit arrangements. This rule applies regardless of whether the financing company operates within or outside the state, as long as the merchant is based in Texas.
The law covers a broad range of financial transactions, including both merchant cash advances (MCAs) and revenue-based financing agreements where repayment fluctuates with business performance. Notably, certain institutions are exempt from these restrictions, particularly those affiliated with banks or credit unions, including out-of-state institutions and their subsidiaries. These entities are not subject to the same limitations regarding automatic withdrawals tied to sales-based financing.
The core provision of HB 700 explicitly states that no provider or broker may initiate automatic debits from a merchant’s account unless they have a legally secured and prioritized claim under Chapter 9 of the Business & Commerce Code. While the law primarily targets ACH transactions, its scope extends beyond electronic fund transfers, imposing broader compliance obligations on the fintech and alternative lending sectors. The regulation will take effect starting September 1, 2025, signaling a strong legislative stance toward protecting small businesses from aggressive collection practices.
This development marks a significant step toward safeguarding commercial interests and promoting fair financial practices for local entrepreneurs. By reinforcing transparency and accountability in business lending, Texas sets a precedent for responsible financial innovation that prioritizes the stability and autonomy of small enterprises across the state.