On September 30, California Governor Gavin Newsom signed Assembly Bill 2116, establishing a new licensing and regulatory framework for providers and brokers of commercial financing to California small businesses. The law expands the California Financing Law (CFL) to regulate commercial financing products, including accounts receivable purchase transactions, factoring, asset-based lending, commercial loans, commercial open-end credit plans, and lease financing.
Beginning January 1, 2028, AB 2116 brings covered commercial financing within the CFL and imposes substantive requirements on providers and brokers. Beginning July 1, 2028, covered providers and brokers generally must obtain a license from the Department of Financial Protection and Innovation (DFPI), although businesses that submit complete applications by that date may continue operating while their applications are pending. Specifically, the law:
- Establishes licensing requirements. Commercial financing providers and brokers generally must obtain a DFPI license, with applicants subject to financial, background, recordkeeping, bonding, and other requirements applicable under the CFL.
- Defines covered commercial financing broadly. The law covers several forms of business-purpose financing offered to qualifying small businesses, including factoring and accounts receivable purchase transactions, for specific financing offers of $500,000 or less.
- Imposes conduct requirements. Providers and brokers may not take confessions of judgment or pre-default powers of attorney, and brokers must disclose on their websites the average and maximum APRs for transactions they facilitated during the prior calendar year.
- Prohibits UDAAPs. The law prohibits unfair, deceptive, or abusive acts or practices in connection with covered commercial financing and commercial financing brokering services.
- Requires annual reporting. Beginning in 2029, covered providers generally must report transaction volume, financing amounts, and APR data to the DFPI for the preceding calendar year.
Putting It Into Practice: AB 2116 significantly expands California’s existing regulation of commercial financing, building on the state’s disclosure, reporting, and UDAAP requirements and recent DFPI enforcement activity involving commercial finance providers (previously discussed here). Providers and brokers offering commercial financing in California should assess whether their products and activities fall within the new framework and begin preparing for the law’s licensing, operational, reporting, and compliance requirements before 2028.