California Reshapes Small Business Financing Licensure Starting in 2028

Client Alert
On September 30, 2026, Governor Gavin Newsom signed Assembly Bill 2116 (AB 2116), which broadens the California Financing Law (CFL) licensure requirements for parties engaged in small business commercial financing. The law expands the current statutory licensure regime to all “covered” commercial financing “providers” and “brokers.”

The most notable change is that effective January 1, 2028, covered financing agreements entered into on or after that date by an entity that is not exempt from licensing (like a bank) will be unenforceable unless the party is licensed with the California Department of Financial Protection and Innovation or has submitted a complete application that is awaiting review.¹

• Under existing law, failure to hold the required license could render interest charges in excess of constitutionally mandated usury limits uncollectible (and could result in fines or even criminal penalties), but did not necessarily render a commercial financing agreement unenforceable.
• It is not clear what the result would be when the financing provider is licensed (or exempt) but the broker is unlicensed. If the financing would be unenforceable, this would create additional risk on entities that are licensed or exempt.
• The new law will now apply to fintechs or others that offer commercial financing products and services through bank or other exempt entity relationships.

In addition, the type of commercial financing transactions that may require a license has been broadened to include accounts receivables financing transactions, commonly known as factoring and merchant cash advances, without regard to whether the economics of the transaction look more like a true sale than a financing.

As with existing licensees, the new licensees will become subject to the CFL’s examination, recordkeeping, reporting, and marketing requirements.²

The new requirements generally become effective on July 1, 2028. However, as mentioned above, a covered commercial financing arrangement entered into on or after January 1, 2028 could be unenforceable unless, at the time the agreement is entered into, the provider holds a license or has submitted a complete licensing application.³

What is the legislative aim of the revision?

AB 2116 adds a new statutory purpose to the CFL: to “protect small businesses against unfair practices by some commercial financing providers, having due regard for the interest of legitimate and scrupulous commercial financing providers.”⁴ The bill followed three failed attempts to regulate this market and was designed to respond to the regulatory gap between traditional commercial lending and non-loan commercial financing.⁵

For small businesses, non-loan products have served the same basic function as loans, but providers and brokers have operated outside the CFL licensing framework because such products are not legally structured as loans. Supporters of this revision pointed to brokers soliciting small businesses to enter into high-cost financing, which they compared to practices that led to the subprime mortgage crisis, and to contract devices and confidentiality clauses that circumvent California’s 2023 statutory ban on confessions of judgment.⁶ AB 2116 unanimously passed 73-0 in the Assembly and 38-0 in the Senate.⁷

What does AB 2116 change?

The CFL’s new licensing regime will extend to “providers” and “brokers” that make or arrange offers for covered types of commercial financing of $500,000 or less to small business “recipients.”⁸

AB 2116 adds new Chapter 3.1, “Commercial Financing for Small Businesses,” to Division 9 of the Financial Code. The new provisions include definitions for the terms “provider” “broker.” “recipient” and “small business.”

A provider is “a person who extends a specific offer of commercial financing to a recipient.”⁹ The definition also includes a nonbank that has a written agreement with a depository institution to arrange for the institution to extend financing through an online lending platform administered by the nonbank.¹⁰ As a result, arrangements between fintechs and banks are explicitly covered by these provisions, whereas previously they may have been exempt.

A recipient is a small business or small business owner who is presented with a specific commercial financing offer by a commercial financing provider that is equal to or less than five hundred thousand dollars ($500,000).

A small business is a for-profit business with annual gross receipts of no more than $16 million, subject to a biennial threshold adjustment.

A broker is a person “engaged in the business of” any of the following seven acts in connection with a provider’s financing:

1. Sending a prospect’s sensitive data to a provider expecting compensation;
2. Making a referral under a criteria-based agreement involving sensitive user data;
3. Participating in negotiations;
4. Advising based on sensitive data;
5. Helping prepare financing documents, excluding handing out blank forms;
6. Communicating approval decisions; and
7. Charging the applicant a fee for application-related services.¹¹

Support tasks, such as providing credit reports or distributing a provider’s marketing materials, do not alone qualify a party as a broker.¹²

Covered commercial financing transactions include commercial loans and revolving credit facilities, accounts receivable purchases (including factoring), merchant cash advances, asset-based financing, and lease financing where the lease creates a security interest (using existing California Commercial Code standards).

AB 2116 also enhances substantive conduct requirements by making a provider’s repeated failure to consider a recipient’s ability to repay when setting a transaction’s size, duration, and repayment features grounds for license suspension or revocation.¹³ Effective January 1, 2028, providers and brokers may not take a confession of judgment or any power of attorney from a recipient before the recipient defaults.¹⁴

Other notable parts of the revision include confirmation that the CFL’s exemption from California’s constitutional usury limit covers “any person licensed under this division” and any licensed providers or brokers are exempt regardless of how a transaction is structured.¹⁵ However, an agreement made on or after January 1, 2028 without a license or without a completed pending application will now be fully unenforceable.¹⁶ We note that as written, the statute does not appear to give a provider or broker with only a pending application an exemption from the usury limits.

Effective January 1, 2028, brokers must "clearly and conspicuously" display on their websites the average and maximum APRs for the commercial financing transactions they facilitated in the most recent calendar year.¹⁷ The statute does not specify whether those figures should reflect only covered transactions within Chapter 3.1’s scope or a broker's entire book. It is also unclear whether brokers must post data for transactions facilitated in 2027, before the requirement takes effect, or whether the first posting will cover 2028 transactions.

Additionally, Chapter 3.1 does not apply to lenders regulated under the Farm Credit Act, depository institutions, real property secured transactions, certain vehicle dealer and rental company financings, or persons who make one or fewer transactions in California in a 12-month period (or five or fewer transactions in a 12 month period if the commercial financing is incidental to another business being conducted during that period).¹⁸ It is unclear whether the “low-volume” exemption applies to brokers, as the use of the word “make” in that exemption implies that it is intended to cover the person that funds the transaction.

1. Cal. Fin. Code § 22658(a)–(b) (operative Jan. 1, 2028), added by Assembly Bill 2116, 2025–2026 Reg. Sess., ch. 823, § 30 (Cal. 2026); see also id. § 22662 (operative date of Chapter 3.1). https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202520260AB2116
2. Cal. Fin. Code § 22701 (examination); id. §§ 22156–22157 (recordkeeping); id. §§ 22159, 22660 (reporting); id. §§ 22161, 22162, 22164 (advertising and marketing).
3. Cal. Fin. Code § 22100.6(b)–(c).
4. Cal. Fin. Code § 22001(a)(8).
5. CA SB 869, CA SB 1482, CA SB 728.
6. https://sjud.senate.ca.gov/system/files/2026-06/ab-2116-schiavo-sjud-analysis_2.pdf
7. https://legiscan.com/CA/bill/AB2116/2025
8. Cal. Fin. Code § 22655(l) (recipient; $500,000 threshold), (o) (small business).
9. Cal. Fin. Code § 22655(g).
10. Id.
11. Cal. Fin. Code § 22655(f)(1)(A)–(G).
12. Cal. Fin. Code § 22655(f)(2)(A)–(E).
13. Cal. Fin. Code § 22714(a)(6).
14. Cal. Fin. Code § 22659(a); see also id. § 22662.
15. Cal. Fin. Code § 22002(a).
16. Cal. Fin. Code § 22658.
17. Cal. Fin. Code § 22659(d).
18. Cal. Fin. Code § 22656(a)–(e).

Relevant Documents