On September 30, California Governor Gavin Newsom signed AB 2116, which brings commercial financing for small businesses under the California Financing Law (CFL) beginning January 1, 2028.

Beginning July 1, 2028, a person may not engage in business as a commercial financing provider or broker without a license from the Commissioner of Financial Protection and Innovation, unless an exemption applies. Applicants that submit a complete application by that date may continue operating while their applications are pending. A commercial financing agreement is not enforceable unless the provider is licensed, has a complete application pending, or entered into the transaction before January 1, 2028. The new chapter does not apply to depository institutions, certain federally regulated farm credit lenders, transactions secured by real property, certain vehicle dealer and rental company transactions, and persons making only one transaction, or five or fewer incidental transactions, in the state in a 12-month period.

The law defines “commercial financing” in a manner consistent with the existing California Commercial Financing Disclosure Law to include various forms of financing primarily for other-than personal, family, or household purposes including accounts receivable purchase transactions such as factoring transactions, asset-based loans, commercial loans, commercial open-end credit plans and lease financing transactions (as distinct from true leases, which are not regulated pursuant to AB 2116). The law covers financing offers of $500,000 or less made to a small business or small business owner, with “small business” defined as a for-profit entity with annual gross receipts of no more than $16 million or a biennially adjusted threshold, whichever is greater. Brokers include persons who, in connection with a provider’s financing: (i) transmit a prospective recipient’s sensitive data with the expectation of compensation in connection with a referral; (ii) participate in negotiations; (iii) advise based on sensitive data; (iv) help prepare financing documents; (v) communicate approval decisions; or (vi) charge applicants fees. Support tasks, furnishing credit reports, or distributing a provider’s marketing materials do not alone qualify an entity as a broker. Providers include nonbanks that arrange financing by a depository institution through an online platform they administer.

New licensees become subject to the CFL’s existing licensing, recordkeeping, reporting, advertising, and examination provisions. The law also bars providers and brokers from taking a confession of judgment or power of attorney before a recipient defaults. It further bars them from including contract terms that restrict recipients from disclosing information gained from their business with the provider. Transactions found unconscionable under the California Civil Code are deemed CFL violations. Brokers must post on their websites the average and maximum annual percentage rates for transactions they facilitated in the most recent calendar year. In addition, the law prohibits unfair, deceptive or abusive acts or practices by providers and brokers and sets out tests for each. Finally, it adds grounds for license suspension or revocation if a provider repeatedly fails to consider a recipient’s ability to repay (ATR) when setting the size, duration and repayment features of a transaction. Notably, this means that the law effectively imposes an ATR requirement on providers of financing that do not typically engage in ATR analyses, including factoring providers.