California has taken another step in regulating commercial financing. In September, Governor Gavin Newsom signed Assembly Bill 2116 (AB 2116), which expands the California Financing Law (CFL) to cover a broader range of commercial financing offered to small businesses. California previously required transaction-level disclosures for commercial financing. Now, AB 2116 establishes a licensing and supervisory framework for commercial financing providers and brokers, including companies involved in accounts receivable purchases (such as merchant cash advance and factoring) and certain bank-partnership programs.
Most of the new substantive requirements become operative on January 1, 2028. Beginning July 1, 2028, a person generally may not engage in the business of a commercial financing provider or broker without obtaining a license from the California Department of Financial Protection and Innovation (DFPI), subject to limited exemptions and a limited transition period for pending license applications.
Scope and Application of the Law
AB 2116 defines "commercial financing" broadly to include an accounts receivable purchase transaction, an asset-based lending transaction, a commercial loan, a commercial open-end credit plan, or lease financing, that is intended primarily for a business or other non-consumer purpose. "Accounts receivable purchase transaction" is further described as a transaction requiring a recipient to forward or sell to the provider all or a portion of accounts, payment intangibles, or cash receipts that are owed to or collected by the recipient during a specified period or in a specified amount; it explicitly includes factoring.
The new law applies when a "recipient"—a small business or small business owner—is presented with a specific commercial financing offer of $500,000 or less. A "small business" generally means a for-profit business with annual gross receipts of no more than $16 million or the higher threshold established by the California Department of General Services.
A "commercial financing provider" is a person who extends a specific offer of commercial financing. Importantly for fintech and bank-partnership models, the definition expressly includes a nondepository institution that enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution through an online lending platform administered by the nondepository institution. But the statute separately clarifies that extending a specific offer on behalf of a depository institution does not, by itself, mean that the nondepository institution originated the financing.
AB 2116 also adopts a relatively detailed definition of "commercial financing broker." Broker activity includes transmitting sensitive applicant data in connection with a compensated referral, participating in a financing negotiation, advising a prospective recipient based on sensitive data, helping prepare financing documents, communicating a provider's approval decision, or charging a prospective recipient a fee for application-related services. By contrast, merely distributing a provider's marketing materials or factual information about its products, rates, loan amounts, terms, or general underwriting criteria does not, by itself, make a person a commercial financing broker.
Licensing Requirements
Beginning July 1, 2028, covered commercial financing providers and brokers generally must be licensed by the DFPI. A person who submits a complete license application on or before July 1, 2028 may continue engaging in the covered business while the application is pending.
AB 2116 adds commercial financing providers and brokers as license categories under the CFL and subjects them to many of the requirements that already apply to other CFL licensees. Among other requirements, applicants and licensees may be subject to background checks, minimum net-worth requirements, a surety bond, branch licensing requirements, annual assessments, books-and-records requirements, and DFPI examination and enforcement authority.
Exemptions
The CFL's existing exemptions remain relevant, including exemptions for banks, credit unions, and certain other regulated entities. AB 2116 also includes exemptions specific to commercial financing. Among others, the new law does not apply to:
- A commercial financing transaction secured by real property
- A person who makes one or fewer commercial financing transactions in California during a 12-month period or
- A person who makes five or fewer commercial financing transactions in California during a 12-month period when those transactions are incidental to the person's business
New Conduct and Contract Requirements
AB 2116 also subjects covered providers and brokers to several substantive requirements and restrictions. Among the more significant provisions are the following:
- Providers and brokers may not take a confession of judgment or a power of attorney before a recipient defaults under the commercial financing agreement
- A provider or broker may not restrict a recipient from disclosing information obtained through its business relationship with the provider, including the terms or conditions of a product or service
- Commercial financing providers and brokers are prohibited from engaging in unfair, deceptive, or abusive acts or practices in connection with covered financing or brokering services
- Commercial financing brokers must clearly and conspicuously post on their websites the average and maximum annual percentage rates (APRs) for commercial financing transactions they facilitated during the most recent calendar year
- The DFPI may suspend or revoke a commercial financing provider's license for repeated failure to consider a recipient's ability to repay the commercial financing transaction
Licensing Status Can Affect Contract Enforceability
Beginning January 1, 2028, a covered commercial financing agreement is generally not enforceable unless the person providing the financing is licensed, subject to some exceptions. The timing is notable because the new law becomes operative on January 1, 2028, while the express prohibition on engaging in business without a license becomes operative on July 1, 2028. Providers should therefore monitor DFPI implementation closely, including when applications will be accepted and how the department will address the January-to-June 2028 transition period. Companies that purchase commercial financing receivables or provide warehouse or other funding may also want to consider how provider licensing status affects transaction eligibility and contractual representations.
Reporting and Ongoing Supervision
The new law also includes an annual reporting provision. Beginning in 2029, covered commercial financing providers generally must file a report with the DFPI by March 15 covering activity during the preceding calendar year. Commercial loan activity conducted under the existing CFL finance-lender provisions is excluded from this particular report. Note that current DFPI regulations already require commercial financing providers to file annual reports each March 15.
More broadly, licensed providers and brokers will be subject to DFPI examination and enforcement authority under the CFL. The commissioner may issue desist-and-refrain orders and seek ancillary relief, including refunds, restitution, disgorgement, or damages, and may suspend or revoke a license for violations of the CFL or applicable rules and orders.
Key Takeaways
AB 2116 represents a significant expansion of California's regulation of small-business financing. Companies that have focused primarily on California's commercial financing disclosure rules will now need to consider a broader licensing, supervision, underwriting, contracting, advertising, and reporting framework.
Commercial financing providers, brokers, fintech platforms, factors, and other participants in small-business financing should begin assessing whether their products and activities fall within the new law, including whether referral and lead-generation arrangements may constitute brokering. Covered companies should also begin planning for licensure, review commercial financing agreements and underwriting practices for the new conduct requirements, and evaluate operational changes needed for recordkeeping, advertising, broker website disclosures, and reporting. Given the statute's January 1 and July 1, 2028 transition dates, companies should also monitor DFPI rulemaking and licensing guidance well in advance of 2028.