Key points
- Beginning January 1, 2028, covered commercial financing agreements will be unenforceable unless the provider is licensed or has submitted a complete license application and is awaiting a decision.
- Beginning July 1, 2028, providers and brokers of small business commercial financing (offers of $500,000 or less) generally may not engage in that business without a license under the California Financing Law (CFL), subject to the pending-application exception.
- Covered agreements with unlicensed providers will be unenforceable, subject to limited exceptions – a significant departure from current California case law.
- Licensing extends to all commercial financing providers making covered small business offers, including companies that purchase receivables or factoring companies.
- California now has its first statutory definition of "commercial financing broker," and brokers must publish average and maximum annual percentage rates (APRs) on their websites.
- Providers and brokers face new unfair, deceptive, or abusive acts or practices (UDAAP) prohibitions, and providers face a de facto ability-to-repay requirement.
Introduction
California Governor Gavin Newsom signed Assembly Bill (AB) 2116 on September 30, 2026. The law's substantive provisions take effect on January 1, 2028, and licensure will be required starting July 1, 2028.
Unlike applicants for other lender or related licenses, providers or brokers that submit a complete application on or before July 1, 2028 may continue engaging in the covered business activities while their application is awaiting approval or denial.
In this alert, we summarize significant impacts of the law for factoring companies, commercial lenders, brokers, fintech platforms, and portfolio purchasers and funding sources.
Agreements with unlicensed providers are unenforceable
AB 2116’s enforceability provision is a consequential feature. Beginning January 1, 2028, a covered commercial financing agreement will be unenforceable unless the provider 1) is licensed, 2) has submitted a complete application and is awaiting approval or denial, or 3) entered into the transaction before January 1, 2028.
Notably, the enforceability provision takes effect six months before the July 1, 2028 date on which AB 2116 will prohibit a person from engaging in business as a commercial financing provider or broker without a license. This creates some uncertainty during the transition period from January 1 to June 30, 2028 because Section 22658 preserves enforceability for providers with pending license applications, yet the provision defining that exception, Section 22100.6(b), does not become operative until July 1, 2028.
This is more than an administrative penalty. It may determine whether the provider – or possibly even an assignee – can collect the money owed. Under existing California case law, the absence of a required finance lender license has not necessarily rendered a commercial loan agreement illegal or unenforceable. AB 2116 establishes an express unenforceability rule for covered commercial financing agreements going forward: lack of the required provider license may render the agreement unenforceable.
Portfolio acquisitions, warehouse facilities, and securitizations
Purchasers and funding sources may need to treat the originator's licensing status as an asset eligibility requirement. To ensure compliance, transaction documents should address licensing through representations, warranties, covenants, indemnities, and mandatory repurchase provisions. A portfolio may have excellent payment performance and pristine documentation, but that offers little comfort if some of its contracts are legally unenforceable.
Brokers
Many broker agreements require the broker to warrant that transactions were lawfully originated, are enforceable, and comply with applicable law. Depending on the language of the broker agreement, a broker could face indemnity, commission clawback, or repurchase claims from the funding source if it places a transaction with an unlicensed provider, falsely represents its own licensing or compliance status, or breaches a contractual compliance warranty. Brokers are encouraged to review those provisions before assuming that licensing is solely the provider's responsibility.
License extension to all commercial financing providers, including factors
The CFL has long required commercial lenders to be licensed. AB 2116 requires licensure for all commercial financing providers and brokers; as a result, factoring companies – which previously were not subject to licensure – will need a license if they make covered offers to small businesses.
- Commercial financing: The definition is consistent with the California Commercial Financing Disclosure Law: financing primarily for other than personal, family, or household purposes, including accounts receivable purchase transactions such as factoring, asset-based loans, commercial loans, commercial open-end credit plans, and lease financing transactions. A provider may rely on the recipient's signed written statement of the financing's intended purpose.
- Scope: The law covers financing offers of $500,000 or less made to a small business or small business owner. Offers above $500,000 are outside the licensing regime.
- Small business: Under the law, a small business is a for-profit entity with annual gross receipts of no more than $16 million or a biennially adjusted threshold, whichever is greater. A licensee may rely on the business's written representations about its gross receipts, including those in an application or agreement.
- Platform providers: Providers include nonbanks that arrange financing by a depository institution through an online platform the nonbank administers – a point of particular relevance to fintech and bank partnership models.
- Exemptions: The new commercial financing chapter does not apply to the following:
- Lenders regulated under the federal Farm Credit Act (12 USC Chapter 23)
- Transactions secured by real property
- Transactions in which the recipient is a dealer, as defined in California Vehicle Code § 285, or an affiliate of such a dealer
- Transactions with vehicle rental companies or their affiliates, for offers or open-end credit plans of at least $50,000
- Persons that make one or fewer commercial financing transactions in California in a 12-month period, or five or fewer that are incidental to their business
First statutory definition of "commercial financing broker" in California
AB 2116 provides California's first statutory definition of a “commercial financing broker” as a person who, in connection with a provider's financing, does any of the following:
- Transmits a prospective recipient's sensitive data with the expectation of compensation in connection with a referral
- Makes a referral under an agreement with the provider that the referred prospective recipient meets criteria involving sensitive data
- Participates in negotiations
- Advises based on sensitive data
- Helps prepare financing documents, other than handing out blank forms
- Communicates approval decisions
- Charges applicants fees
Performing support tasks, furnishing credit reports, or distributing a provider's marketing materials does not, alone, make someone a broker. Businesses that rely on independent sales organizations (ISOs), referral partners, or lead generators are encouraged to review those relationships.
Brokers must publish APRs on their websites
Brokers must post on their websites the average and maximum APRs for transactions they facilitated in the most recent calendar year. This is a significant transparency requirement, particularly in the factoring and revenue-based financing markets, where APR-equivalent pricing has not traditionally been published.
Commercial financing agreement restrictions
AB 2116 imposes new substantive restrictions on commercial financing agreements. Providers and brokers may not take a confession of judgment or power of attorney before a recipient defaults. Agreements also may not restrict recipients from disclosing information obtained through their business relationship with the provider, including the terms or conditions of a product or service. In addition, a commercial financing transaction found unconscionable under California Civil Code § 1670.5 will constitute a violation of the CFL.
UDAAP and ability to repay
UDAAP: AB 2116 prohibits UDAAP by providers and brokers, with separate statutory tests for unfair, deceptive, and abusive conduct.
Ability to repay: The law adds a new ground for license suspension or revocation if a provider repeatedly fails to consider a recipient's ability to repay when setting a transaction's size, duration, and repayment features. This effectively imposes an ability-to-repay requirement on providers that typically do not perform such analyses, including factoring providers, which will likely need to build or document underwriting processes.
Practical considerations
With the licensing date approximately 15 months away, factoring companies, brokers, platform providers, and portfolio purchasers and funding sources may wish to take the following steps:
- Assess coverage: Determine whether your products, transaction sizes, customers, and roles (provider, broker, or platform) fall within AB 2116.
- Plan for licensure: The deadline to submit a complete application and maintain operations while it is pending is July 1, 2028. For enforceability purposes, however, January 1, 2028 is the key date: Agreements entered into on or after that date are unenforceable unless the provider is licensed or has a complete application pending.
- Review transaction documents: Purchasers and funding sources may consider updating portfolio purchase, warehouse, and securitization documents to address originator licensing through eligibility criteria, representations, warranties, covenants, indemnities, and repurchase provisions.
- Review broker agreements: Providers and brokers may consider evaluating compliance warranties, indemnities, clawback, and repurchase provisions in light of the new licensing and enforceability rules.
- Update practices: Update underwriting, disclosure, and broker and referral-partner oversight practices, including ability-to-repay processes and broker APR website postings.
- Monitor rulemaking: Track implementing regulations from the California Department of Financial Protection and Innovation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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