California Enacts Sweeping Commercial Financing Licensing Rules
California passed AB 2116, creating new licensing rules for commercial financing.
Why it matters: These regulations impact lenders and borrowers in California's small business financing market, requiring swift compliance efforts to avoid unenforceable agreements and regulatory penalties.
- AB 2116 signed September 30, 2026, expands California Financing Law to cover various commercial financing products.
- Starting January 1, 2028, unlicensed commercial financing agreements become unenforceable.
- Licensing for providers and brokers offering commercial financing up to $500,000 begins July 1, 2028.
- The law bans unfair business practices, confession of judgment clauses, and requires lenders to post APR information online.
On September 30, 2026, California Governor Gavin Newsom enacted Assembly Bill 2116, a significant expansion of the state’s commercial financing regulations. This new law extends the California Financing Law (CFL) to cover a broad range of commercial financing products such as accounts receivable purchases, factoring, asset-based lending, commercial loans, open-end credit plans, and lease financing, as detailed in a Hinshaw & Culbertson LLP analysis.
The law aims to enhance protections for small businesses by requiring commercial financing providers and brokers to obtain a license under the CFL if they offer financing up to $500,000, with the licensing requirement taking effect July 1, 2028. A crucial provision states that starting January 1, 2028, any commercial financing agreement covered by AB 2116 is unenforceable if the provider is not licensed or has not submitted a complete license application, signaling a new enforceability risk emphasized by DLA Piper attorneys in their review.
Beyond licensing, AB 2116 prohibits providers and brokers from requiring a confession of judgment or power of attorney before a borrower defaults. It also bans deceptive, unfair, abusive, or misleading business practices, along with contract terms that restrict borrowers from freely sharing information about their financing. Furthermore, brokers must publish average and maximum annual percentage rates (APRs) on their websites, reinforcing transparency.
These changes build on previous regulatory efforts such as SB 1235, tightening disclosure and consumer protections. As John A. Kimble of Hinshaw & Culbertson LLP noted, AB 2116 "has significant implications for commercial financing providers and raises a number of unanswered questions that stakeholders should monitor closely." Corporate legal teams and lenders must prepare for the new compliance landscape, balancing these regulatory demands with business strategies to remain enforceable and competitive.
By the numbers:
- January 1, 2028 — Commercial financing agreements unenforceable without provider license or application.
- July 1, 2028 — Licensing requirement effective for financing offers of $500,000 or less.
- $500,000 — Threshold for small business commercial financing offers subject to licensing under AB 2116.
Yes, but: Some details remain unclear, such as enforcement mechanisms during the transition period between January and July 2028 and penalties for non-compliance.
What's next: Legal teams and commercial lenders should start preparing immediately for licensing applications ahead of the July 1, 2028, effective date and monitor regulatory guidance for compliance updates.