California Expands the California Financing Law to Include Small Business Commercial Financing

On September 30, 2026, California Governor Gavin Newsom signed Assembly Bill 2116 (Chapter 823, Statutes of 2026) (the “Amendments”), expanding the California Financing Law (CFL) beyond traditional commercial lending to regulate certain providers and brokers of commercial financing for small businesses. The Amendments cover specified commercial financing offers of $500,000 or less, including merchant cash advances, factoring, and other accounts receivable purchase transactions, and establish licensing requirements for covered providers and brokers.

Key Highlights

• AB 2116 significantly expands the CFL beyond traditional lending. The Amendments bring covered small-business commercial financing operating in California, including factoring and other accounts receivable purchase transactions such as merchant cash advances, into the CFL and establish licensing and supervisory requirements for commercial financing providers and brokers.

• The new law is part of a broader California small-business legislative package. Governor Newsom signed AB 2116 as part of a package intended to strengthen protections and opportunities for small businesses, including measures addressing competition, business permitting, access to vacant storefronts, technical assistance, and commercial financing practices.

• Important implementation questions remain. Among other issues, the statute creates uncertainty regarding the relationship between the Chapter 3.1 exemptions and the separate licensing requirement, as well as the enforceability of agreements entered into between January 1 and June 30, 2028, before the licensing prohibition becomes operative.

• Effective Dates. Most of the new provisions become operative on January 1, 2028. The prohibition against engaging in covered commercial financing provider or broker activities without a license becomes operative on July 1, 2028.

Background

In 2018, California became the first state to enact consumer-style disclosures for commercial financing, which require that covered providers disclose key financing terms for offers of $500,000 or less. Covered products include commercial loans, commercial open-end credit plans, lease financing, factoring, other accounts receivable purchase transactions, and asset-based lending.[1] The disclosure obligations fall on providers, rather than creating a general independent disclosure obligation for brokers. Depository institutions are exempt, but the definition of “provider” includes a nondepository institution that administers an online platform and arranges financing by a depository institution.

In 2023, the Department of Financial Protection and Innovation (DFPI) adopted regulations under the California Consumer Financial Protection Law (CCFPL) addressing unlawful, unfair, deceptive, or abusive acts or practices in the offering and provision of commercial financing and other financial products or services to small businesses, nonprofits, and family farms. The regulations require covered commercial financing providers to report specified commercial financing activity annually to the DFPI.

These Amendments build upon and supplement existing requirements for small business financing. They establish a separate CFL licensing and supervisory regime for providers and brokers of covered small business commercial financing, together with substantive conduct and reporting requirements. Existing CCFPL requirements and CFL licensing requirements for commercial loans may already apply independently of the Amendments.

Provisions of the Amendments

The principal provisions of the Amendments include:

• Coverage Expansion.
• A “commercial financing provider” generally is a person that extends a specific offer of commercial financing, including certain nondepository online-platform arrangers.
• The definition of “commercial financing broker,” covers specified referral, negotiation, advisory, document-preparation, approval-communication, and application-fee activities, subject to express exclusions for certain administrative and informational services.
• A “recipient” is defined as a qualifying small business or small business owner presented with a specific financing offer of $500,000 or less.
• A “small business” is a for-profit business entity with annual gross receipts not exceeding the greater of $16 million or the amount adjusted biennially by the Department of General Services under Government Code § 14837. A licensee may rely on relevant written representations concerning annual gross receipts. New Cal. Fin. Code § 22655.
• Licensure. Beginning July 1, 2028, a person generally may not engage in the business of a commercial financing provider or commercial financing broker without a CFL license, subject to applicable exemptions discussed further below. A person that submits a complete application on or before July 1, 2028 may continue engaging in those activities while the application is awaiting approval or denial.[2] New Cal. Fin. Code § 22100.6. Existing CFL licenses and exemptions should be evaluated to determine whether additional licensing is required.
• Contract Enforceability. Beginning January 1, 2028, a covered commercial financing agreement is not enforceable unless the provider is licensed, has submitted a complete license application and is awaiting action under the statutory exception, or the transaction was entered into before January 1, 2028. New Cal. Fin. Code § 22658.
• Restrictions on Agreements. Commercial financing providers and commercial financing brokers may not take a confession of judgment or power of attorney before a recipient defaults. They also may not include terms preventing a recipient from disclosing information obtained through its dealings with a provider, including product or service terms. A commercial financing transaction found unconscionable under Civil Code § 1670.5 is deemed a CFL violation. New Cal. Fin. Code § 22659(a)–(c).
• Exemptions.
• Certain lenders regulated under the federal Farm Credit Act (12 U.S.C. § 2001 et seq.); commercial financing transactions secured by real property;
• transactions with specified vehicle dealers or their affiliates; qualifying transactions with vehicle rental companies or their affiliates involving an offer or open-end credit plan of at least $50,000;
• persons making no more than one commercial financing transaction in California in a 12-month period; and persons making five or fewer such transactions incidental to their business in a 12-month period.
  
  Separately, the CFL contains broader, division-wide exemptions, including for certain banking and other regulated entities and specified incidental commercial loan activity. Cal. Fin. Code § 22050.
• Website APR Disclosure. A commercial financing broker must clearly and conspicuously display on its website the average and maximum annual percentage rates (APRs) for commercial financing transactions it facilitated in the most recent calendar year. New Cal. Fin. Code § 22659(d). For purposes of this requirement, APR is calculated under California’s existing commercial financing disclosure regulations, which are informed by federal Regulation Z requirements but use distinct methodologies in important respects, as we have covered previously.
• Disclosure of Rates of Charge. New Cal. Fin. Code § 22807 authorizes the DFPI to require that rates of charge be stated fully and clearly in the manner the DFPI deems necessary to prevent misunderstanding by prospective borrowers or recipients.
• Repayment Ability and Supervisory Consequences. The Amendments authorize license suspension or revocation where a commercial financing provider repeatedly fails to consider a recipient’s financial ability to repay the transaction under its terms or refinance it at maturity when determining its size, duration, and repayment features. Cal. Fin. Code § 22714(a)(6), as amended.
• Annual Report to the DFPI. By March 15 of each year, beginning in 2029, a licensed commercial financing provider must electronically file an annual report with the DFPI, verified by an authorized officer, covering the preceding calendar year. The report must include identifying and contact information and, by type of commercial financing: (i) the number of transactions and total amount financed; and (ii) the number of transactions in each specified amount-financed interval (through $500,000) and the minimum, maximum, average, and median APR disclosed for each interval, subject to certain exclusions. New Cal. Fin. Code § 22660.
• Unlawful, Unfair, Deceptive, or Abusive Practices. Section 22661 prohibits unlawful, unfair, deceptive, or abusive acts or practices by commercial financing providers and brokers in connection with covered financing and brokering services and specifies standards for determining when acts or practices are unfair, deceptive, or abusive.

Remaining Questions and Next Steps

The Amendments raise several issues that may warrant regulatory or legislative clarification. First, the exemptions specific to commercial financing (for certain Farm Credit Act lenders, real property–secured commercial financing, specified vehicle dealer and rental company transactions, and persons making only a limited number of commercial financing transactions in California within a 12-month period) on their face apply only to the new chapter governing small business commercial financing restrictions and do not expressly apply to the new licensing requirements which are located in a different chapter. This raises uncertainty as to whether a person engaged in an exempt category of commercial financing avoids the separate licensing provision. This issue is particularly relevant to occasional non-loan financing transactions. For example, a person that makes only one non-loan commercial financing transaction in a 12-month period would not be subject to the commercial financing disclosure law or the provisions of new Chapter 3.1, but may nonetheless need to obtain a CFL license. It seems unlikely that this was the intent of the legislature and may need to be addressed by the legislature or the DFPI.

Second, the contract-enforceability rule becomes operative January 1, 2028, six months before the licensing prohibition becomes operative on July 1, 2028, creating uncertainty about the enforceability of agreements entered into during this six-month period. Providers should assess this sequencing carefully and consider seeking DFPI guidance before relying on the July 2028 licensing date as sufficient to protect enforceability.

Providers, brokers, fintech platforms, and purchasers of commercial financing receivables operating in California should review product coverage, exemptions, licensing status, contract terms, reporting systems, and broker-facing practices well before January 1, 2028. Providers operating nationally should also be aware that other states have adopted their own disclosure, registration, and conduct requirements for commercial financing products. While the DFPI is not required to issue implementing regulations, it may choose to clarify aspects of the Amendments through rulemaking, guidance, or other supervisory communications. We will continue to monitor the DFPI’s implementation of the new requirements and identify practical issues as providers and brokers prepare for licensing and compliance.

[1] In 2022, the Small Business Finance Association challenged California’s commercial financing disclosure regulations on First Amendment and federal preemption grounds. The district court rejected the challenge in 2023, which the Ninth Circuit affirmed in 2025.

[2] The CFL licensing process generally entails the following requirements: (i) Identification and background review of specified individuals, including required fingerprints and criminal-history checks; (ii) Business and organizational information and other supporting materials; (iii) A business plan; (iv) Financial statements demonstrating at least $25,000 in net worth; (v) A surety bond of at least $25,000; and (vi) Ownership and management information.