On September 30, Governor Newsom signed Assembly Bill 2116, a significant expansion of the California Financing Law (CFL) that brings additional categories of small-business commercial financing under state licensing requirements and increases consumer protections for the transactions. This development continues the multi-year trend toward the consumerization of small business finance, especially at the state level. A legislative analysis of the bill appears here.
Link to What’s Changing What’s Changing
Beginning January 1, 2028, the CFL will regulate “commercial financing,” a term defined broadly to capture revenue-based financing, factoring, asset-based lending transactions, commercial loans, commercial open-end credit plans, and lease financing, provided the amount is $500,000 or below and the financing is intended primarily for a business rather than a personal, family, or household purpose. (Commercial credit sales do not appear to be included.) AB 2116 then requires any “commercial financing provider” and “commercial financing broker” to obtain a license from the Department of Financial Protection and Innovation (DFPI). The new licensing requirements do not disturb existing CFL licensing requirements for lenders and brokers of commercial loans under the CFL.
The new licensing requirement itself doesn’t take effect until July 1, 2028. A grace period softens the transition, allowing entities that submit a complete license application by July 1, 2028 to continue operating while their application is pending. The DFPI is expected to issue implementing regulations by then.
The bill also adds a new Chapter 3.1 (§§ 22655–22662) establishing detailed definitions, exemptions, and conduct rules specific to commercial financing for small businesses, generally meaning recipients with gross receipts up to $16 million (as adjusted every two years) who receive financing offers of $500,000 or less. The $16 million threshold is not fixed.
AB 2116 also extends the CFL’s exemption from California’s constitutional 10% annual usury cap to any person holding a CFL license (including the new licenses created by AB 2116), regardless of how a particular transaction is structured.
Link to Who Counts as a “Commercial Financing Provider”? Who Counts as a “Commercial Financing Provider”?
The definition of this term is very similar to the “Provider” definition in the Commercial Finance Disclosure law and regulations. Thus, the definition includes those who partner with banks, specifically “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 to a recipient via an online lending platform administered by the nondepository institution.” As a result, non-bank partners offering even standard commercial loans will need this “provider” license, even though they have not needed a CFL “broker” license to broker for a bank.
Link to Who Counts as a “Commercial Financing Broker”? Who Counts as a “Commercial Financing Broker”?
Persons are swept in as “commercial financing brokers” if they transmit a prospective recipient’s sensitive data (bank account numbers, credit scores, or income information) to a provider in exchange for compensation tied to a referral, participate in negotiating the financing, advise a prospective recipient on a deal based on that sensitive data, help prepare financing documents or applications, relay a provider’s approval decision, or charge a recipient a fee for application-related services.
On the other hand, the law carves out from the definition purely administrative or support work (typing, filing, scheduling, and similar tasks), the routine furnishing of consumer reports or credit reports by reporting agencies under existing federal and California credit reporting laws, and simply distributing a provider’s general marketing materials or factual product information.
Link to Key Conduct Requirements Key Conduct Requirements
AB 2116 also imposes a series of substantive conduct obligations on commercial financing providers and brokers. They are barred from taking a confession of judgment or any power of attorney at any time before a recipient defaults, and any commercial financing agreement found unconscionable under Civil Code Section 1670.5 is deemed a CFL violation.
The law also prohibits “gag clauses” that would restrict a recipient from discussing the terms or conditions of its financing, and requires brokers to disclose conspicuously on their websites the average and maximum annual percentage rates for the transactions they facilitated in the prior calendar year. The law also incorporates a broad prohibition on unfair, deceptive, or abusive acts or practices (UDAAP), borrowing from the federal UDAAP framework and setting out defined, multi-part tests for what counts as “unfair,” “deceptive,” and “abusive.”
Link to Reporting Obligations Reporting Obligations
Starting in 2029, commercial financing providers must file detailed annual reports with DFPI covering transaction volumes, dollar amounts financed, and APR data broken out by financing type and loan-size tier.
Link to Notable Exemptions Notable Exemptions
The new chapter carves out several categories of financing and providers from its reach. For example, the law exempts commercial financing transactions secured by real property. Transactions with vehicle dealers or vehicle rental companies (or their affiliates) are also exempt, subject to certain conditions, such as a minimum offer threshold for rental company financing.
Link to Why It Matters Why It Matters
AB 2116 effectively imports the CFL’s licensing infrastructure further into the commercial financing space. Fintechs, factoring companies, merchant cash advance providers, and those captured by the new “commercial financing broker” definition should begin assessing licensing needs for California well ahead of the July 2028 deadline.