North Dakota Redefines Alternative Financing: A Quiet Shift With Loud Implications

If you’ve been keeping an eye on regulatory rumblings in the alternative finance world, you may have heard by now that North Dakota recently passed a law that’s shaking things up. House Bill 1127 amends the state’s Money Brokers Act, and while the bill itself may not have made national headlines, the implications are significant, especially for funders and fintech companies offering products like merchant cash advances, factoring, and revenue-based financing.

The crux of the law? North Dakota now has the authority to define these alternative finance products as “loans,” putting them under the same regulatory umbrella as traditional lenders. This includes licensing requirements and interest rate caps, up to 36% annually. What’s more, the state’s financial regulator, the Department of Financial Institutions (DFI), has been granted the discretion to classify these products through administrative orders.

Not Just Semantics

On the surface, this might seem like a minor legislative tweak. However, in practice, it represents a significant shift in how one state chooses to treat non-loan financial products, ones that have historically operated outside of traditional lending laws. Merchant cash advances, for instance, have long skirted usury laws because they are technically purchases of future receivables, not loans. By redefining these arrangements as loans based on their operational characteristics rather than their labels, North Dakota is setting a new tone in the regulatory conversation.

For now, this only affects businesses operating in North Dakota. But the move adds to a growing list of state-level efforts to regulate or scrutinize alternative financing. California, New York, and Connecticut have passed disclosure laws aimed at improving transparency. Now, North Dakota is taking it a step further by targeting the legal classification of the products themselves.

Why This Matters

There are a few reasons this matters more than it might appear:

1. Precedent-Setting: Other states could follow North Dakota’s lead. If more state regulators begin reclassifying alternative financing as loans, it could trigger a broader compliance reckoning across the industry.

2. Licensing and Rate Caps: For MCA providers and fintech platforms, a 36% APR cap and mandatory licensing could drastically change underwriting models, risk assessment, and funding structures.

3. Regulatory Uncertainty: The DFI’s discretionary authority leaves funders guessing. Which products will be targeted? Will it apply only to consumer-facing offers, or will it bleed into commercial products as well?

Looking Ahead

This kind of reclassification may be just the beginning. In the broader landscape, regulators are clearly growing more cautious about products that operate in legal gray areas, particularly when those products are used by small businesses that may not fully understand the terms or consequences.

If you're in the MCA or alternative lending space, the time to adapt is now. Expect increased legal scrutiny, evolving compliance requirements, and potentially more legal challenges around how these products are marketed and structured.

That said, regulation isn’t inherently bad for the industry. Clearer standards can create a more level playing field and build trust with borrowers. The key is transparency, fair terms, and a willingness to evolve with the regulatory climate.

North Dakota might not be a major hub for alternative finance, but its decision to quietly redefine the game may echo louder than expected in the months ahead.

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*Source: “North Dakota Law Regulates ‘Alternative Financing’ as a ‘Loan’” by Hudson Cook, LLP