California Expands Licensing and Oversight of Small Business Commercial Financing Transactions

California lawmakers recently approved expanded commercial financing regulation to cover transactions offered to small businesses and to expand the scope of entities subject to existing law. The expansion of the California Financing Law (CFL) establishes licensing, conduct, and reporting requirements for commercial financing providers and brokers in such transactions, in a manner broader than the current scope.

The new requirements generally apply when a commercial financing provider or broker presents a specific financing offer of $500,000 or less to a small business (defined as having annual gross receipts of $16 million or less) or a small business owner. While traditional loans made by licensed finance lenders are already regulated under California law, many alternative lending products fall outside the scope of these regulations. Such transactions include merchant cash advances, accounts receivable financing, invoice factoring, and various revenue-based financing products. Further, the new amendments expand the scope of the law beyond credit extensions made by licensed finance lenders under the CFL’s authority.

The Legislature approved Assembly Bill 2116, and on September 30, 2026, Governor Gavin Newsom signed it into law.

How the California Financing Law Expansion Impacts Small Business Transactions

The new regulations require commercial financing providers and commercial financing brokers to obtain a license from the Department of Financial Protection and Innovation (DFPI). A person may engage in the business of a commercial financing provider or broker if a complete license application is submitted on or before July 1, 2028, and is awaiting approval or denial of the application.  However, effective January 1, 2028, small business commercial financing agreements are not enforceable unless (i) the provider is licensed, (ii) the provider has submitted a complete license application to the DFPI, or (iii) the transaction was entered into prior to January 1, 2028. This creates some uncertainty for transactions entered into between January 1 and June 30, 2028, prior to the provider submitting a license application.

A licensed commercial financing provider may also act as a commercial financing broker at its licensed place of business without obtaining an additional license—but the provider must give written notice to the DFPI Commissioner first. Commercial financing providers and brokers are prohibited from taking a confession of judgment or power of attorney before a recipient defaults. The new regulations bar contractual provisions restricting a recipient from disclosing information learned through its business relationship with the provider. Commercial financing brokers must also clearly and conspicuously display on their websites the average and maximum APRs for commercial financing transactions they facilitated during the most recent calendar year.

Beginning in 2029, commercial financing providers also must electronically file an annual report with the DFPI by March 15 covering the preceding calendar year. Among other things, the report must identify the total number and dollar amount of covered transactions by type of commercial financing and financing amount, as well as specified minimum, maximum, average, and median APR information. Commercial loan activity conducted under specified existing CFL authority is excluded from this reporting requirement, as it is already covered by pre-existing annual report requirements.

Some transactions, including those by automobile dealers and vehicle rental companies, are excluded from the new regulations.

Why These New Regulations Came to Be

In passing an expansion of the California Financing Law, lawmakers noted the “diverse array of products with varying structures and terms” of commercial financing products in the market. The new regulations aim to streamline and clarify how these products are regulated pertaining to small business transactions and impose certain additional requirements and supervision on market participants.

Previously, the Legislature applied California’s debt collection laws to the same kind and size of small businesses, but that legislation created no new licensing obligations. This expansion of the CFL is an effort to close that loop.

What Commercial Financing Providers and Brokers Need to Do

The good news for commercial financing providers and brokers is that they have ample time to comply with these expanded regulations. They should begin by examining their services and determining whether they fall under these new regulations.

If so, commercial financing providers and brokers should make sure they are aware of the key dates described above and are prepared to apply for a license before January 1, 2028. Although a provision allows providers to submit a license application through July 1, 2028, and continue operating while awaiting an approval decision, the enforceability of transactions entered into on or after January 1, 2028 is uncertain if an application has not been submitted by that date.

If you have any questions about the issues raised in this alert, please contact the authors or the Womble Bond Dickinson attorneys with whom you normally work.