California Sets New Licensing Rules for Small Business Financing
California is expanding its oversight of small business commercial financing with a new licensing framework that will bring providers and brokers under the California Financing Law beginning in 2028.
Governor Gavin Newsom signed AB 2116 on September 30. The law requires commercial financing providers and brokers to obtain a license from the Commissioner of Financial Protection and Innovation starting July 1, 2028, unless an exemption applies. The broader statutory changes take effect January 1, 2028.
Businesses that submit a complete license application by July 1, 2028, may continue operating while the application is pending. Commercial financing agreements generally will not be enforceable unless the provider is licensed, has a complete application pending, or entered into the transaction before January 1, 2028.
Who Falls Under the New Licensing Rules
AB 2116 applies to commercial financing offers of $500,000 or less made to a small business or small business owner. The law defines a small business as a for-profit entity with annual gross receipts of no more than $16 million, or a higher threshold if adjusted biennially.
Covered financing includes several types of business-purpose transactions already addressed under California’s Commercial Financing Disclosure Law. These include accounts receivable purchase transactions such as factoring, asset-based loans, commercial loans, commercial open-end credit plans, and certain lease financing transactions. True leases are not covered.
The definition of a broker is also broad. A person may fall within the definition by transmitting sensitive applicant data for compensation tied to a referral, participating in negotiations, advising based on sensitive data, helping prepare financing documents, communicating approval decisions, or charging applicants fees.
However, certain support functions do not by themselves make an entity a broker. Examples include providing credit reports, performing administrative support, or distributing a provider’s marketing materials.
Exemptions and Provider Requirements
The law includes several exemptions. Depository institutions, certain federally regulated farm credit lenders, real property-secured transactions, and some vehicle dealer and rental company transactions are outside the new chapter.
Limited transaction activity may also qualify for an exemption. This includes a person making only one transaction, or no more than five incidental transactions, in California during a 12-month period.
Covered providers also include certain nonbanks that use online platforms to arrange financing funded by depository institutions.
Once licensed, providers and brokers will be subject to existing California Financing Law requirements involving recordkeeping, reporting, advertising, examinations, and other regulatory obligations.
New Conduct Standards for Providers and Brokers
AB 2116 adds several restrictions beyond licensing.
Providers and brokers may not obtain a confession of judgment or power of attorney before a recipient defaults. Contracts also cannot restrict recipients from disclosing information learned through their business dealings with a provider.
The law further treats transactions found unconscionable under the California Civil Code as violations of the California Financing Law. It also prohibits unfair, deceptive, or abusive acts or practices and establishes standards for determining when that conduct has occurred.
Brokers will have an additional public disclosure requirement. They must post the average and maximum annual percentage rates for transactions they facilitated during the most recent calendar year on their websites.
Ability-to-Repay Standard Could Expand Compliance Duties
One of the law’s more significant provisions involves a recipient’s ability to repay.
AB 2116 allows regulators to suspend or revoke a license when a provider repeatedly fails to consider a recipient’s ability to repay when determining transaction size, duration, and repayment terms.
That provision could be especially important for financing models that have not traditionally relied on formal ability-to-repay analysis. Factoring providers, in particular, may need to evaluate how the requirement affects underwriting, documentation, and compliance processes.
What the New Law Means Going Forward
The 2028 effective dates give commercial financing companies time to assess whether their products and activities fall within AB 2116, determine whether an exemption applies, and prepare for licensing and operational changes.
For providers and brokers active in California’s small business financing market, the law represents more than a new license requirement. It adds conduct standards, disclosure obligations, and underwriting expectations that could affect how transactions are structured, marketed, documented, and reviewed.
