California has once again expanded its regulation of financial services. On September 30, 2026, Governor Gavin Newsom signed Assembly Bill 2116, which will subject a broad range of commercial financing providers and brokers to licensing, substantive conduct requirements, and regulatory oversight by the California Department of Financial Protection and Innovation (DFPI). A legislative analysis of the Bill appears here.
AB 2116 represents a significant expansion of California’s existing regulatory framework for commercial financing. Although the law does not become operative until January 1, 2028, commercial finance companies, merchant cash advance providers, factors, equipment finance companies, and brokers potentially within its scope will need to begin assessing the law well before then.
What Does AB 2116 Cover?
The new law generally applies to “commercial financing” transactions of $500,000 or less involving qualifying small businesses.
The legislation defines a covered “commercial financing” transaction broadly to include commercial loans, accounts-receivable purchase transactions, including factoring, asset-based lending, commercial open-end credit plans, and lease financing. The definition therefore reaches companies providing products that historically have not been treated as conventional loans and that have operated with considerably less regulatory oversight than traditional commercial lenders.
The law generally targets transactions involving a for-profit small business with annual gross receipts of no more than $16 million, subject to statutory adjustments.
There are also specific exclusions. For example, the law excludes certain transactions involving automobile dealers, vehicle rental companies, and their affiliates under specified circumstances. Companies will therefore need to examine not only the type and amount of financing they provide but also the identity and characteristics of the recipient.
Licensing Will Be the Most Significant Change
Perhaps the most important feature of AB 2116 is that it brings covered “commercial financing” providers and brokers into the California Financing Law’s licensing regime.
Beginning January 1, 2028, a person generally may not engage in the business of a “commercial financing provider” or “commercial financing broker” without obtaining a license from the DFPI. A person that submits a complete license application by January 1, 2028, may continue operating while the application is pending.
The broker licensing requirement is not limited to brokers arranging the alternative financing transactions that AB 2116 brings into the licensing regime for the first time. It also applies to companies acting as brokers for lending businesses that were already required to be licensed under the California Financing Law. Under current law, an entity brokering a conventional commercial loan is required to hold a license under the California Financing Law only where the lender is licensed under the California Financing Law. AB 2116 would appear to be expanding the license requirement to cover brokering conventional commercial loans (as well as other commercial financing transactions) of $500,000 or less made by any commercial financing provider, which includes depository institutions, and not only lenders licensed under the California Financing Law. This is one of several issues that warrants monitoring.
This is an important change because California already regulates commercial loans under the California Financing Law, but many alternative commercial financing products have not been subject to the same licensing requirements.
AB 2116 is designed, among other things, to close that regulatory gap. The Legislature’s analysis specifically identified merchant cash advances, accounts-receivable financing, invoice factoring, and revenue-based financing as examples of products that historically could fall outside the DFPI’s principal licensing authority.
The statute is not limited to companies with offices or other physical facilities in California. Its licensing requirements generally apply based on the covered activity and the location of the recipient, so an out-of-state lender or broker that extends covered financing from outside California to a business physically located in California should assume that the law may apply. The statute does not appear to create a general physical-presence exception. Companies operating from outside California will need to evaluate the statutory definitions, any applicable exemptions, and the DFPI’s implementing regulations.
Brokers Are Specifically Targeted
AB 2116 does not regulate only companies that actually provide financing. It also creates a detailed definition of “commercial financing brokerage services.”
Among the activities potentially constituting brokerage services are transmitting sensitive information about a prospective recipient to a financing provider for compensation, making certain referrals, participating in financing negotiations, advising or making recommendations based on specified sensitive data, participating in the preparation of financing documents, communicating financing approval decisions, and charging a prospective recipient a fee relating to its financing application.
The statute defines “sensitive data” to include items such as bank account numbers, bank statements, credit or debit card account numbers, and credit scores. Certain administrative and support activities are excluded from the definition.
This means that companies that regard themselves as marketing organizations, lead generators, or consultants rather than “brokers” will need to carefully examine their actual activities and compensation arrangements to determine whether they are subject to licensure.
New Substantive Restrictions
AB 2116 also establishes a number of substantive requirements applicable to covered commercial financing providers and brokers.
Among other things, the law prohibits a provider or broker from taking a confession of judgment or power of attorney before a recipient defaults under a commercial financing agreement.
In addition, an agreement found to be unconscionable under California Civil Code section 1670.5 will constitute a violation subject to the remedies available under the new law.
The statute also prohibits contractual provisions restricting a recipient from disclosing information it obtains through its business relationship with the registrant, including terms and conditions of the provider’s products or services.
New Disclosure Requirements for Brokers
AB 2116 imposes an additional requirement specifically on commercial financing brokers.
A broker will be required to clearly and conspicuously display on its website the average and maximum annual percentage rates for commercial financing transactions it facilitated during the most recent calendar year.
This provision could present practical issues for brokers offering financing products whose economics do not fit neatly within a conventional APR calculation. It also raises questions about how the DFPI will interpret and implement the requirement for products such as factoring and sales-based financing.
Rulemaking and Regulatory Examinations
The DFPI must adopt regulations implementing the new licensing provisions by January 1, 2028. Those regulations will be important in determining the application process, required records, exemptions, examination procedures, and the treatment of products whose economics do not fit neatly within a conventional loan model.
Licensees should expect to be subject to DFPI supervision and regulatory examinations. The California Financing Law authorizes the DFPI to examine licensees and their books, records, and business practices, and AB 2116 places covered commercial financing providers and brokers within that framework. Companies should therefore prepare not only for initial licensing but also for ongoing examination and information requests.
Enforcement Consequences and Borrower Remedies
AB 2116 integrates covered commercial financing providers and brokers into the California Financing Law’s existing enforcement framework.
The DFPI may investigate violations, conduct examinations, issue desist-and-refrain orders, suspend or revoke licenses, and seek ancillary relief, including restitution, refunds, disgorgement, and damages where authorized. Violations may also result in administrative penalties and other relief available under the California Financing Law.
One particularly important provision provides that a commercial financing agreement generally will not be enforceable unless the provider is properly licensed, has submitted a complete license application and is awaiting a decision, or the transaction was entered into before January 1, 2028.
The statute also gives borrowers and other recipients potential defenses and claims based on violations of the Act, including challenges to the enforceability of an agreement entered into by an unlicensed provider. Depending on the violation and the applicable statutory provision, a recipient may seek restitution, damages, injunctive relief, or other remedies available under the California Financing Law and related California law.
Industry Reaction
Industry reaction has been mixed. Supporters of the legislation, including the Responsible Business Lending Coalition (RBLC), have characterized it as an important consumer- and small-business-protection measure that will bring greater transparency and accountability to merchant cash advances, factoring, revenue-based financing, and other products that have not consistently been subject to lender-style oversight.
Industry participants and trade groups, however, have raised concerns about the breadth of the licensing regime, the potential application of the law to out-of-state companies, the APR reporting requirement, and the possibility that rules designed for conventional lenders will not fit products such as receivables purchases and sales-based financing. Those concerns are likely to be addressed, at least in part, through the DFPI’s regulations.
AB 2116 Builds on Existing California Regulation
AB 2116 should not be viewed in isolation.
California already requires disclosures for specified commercial financing transactions of $500,000 or less. Those disclosures include the amount financed, total cost of financing, term or estimated term, payment amounts and frequency, and prepayment policies.
California also already has authority under its California Consumer Financial Protection Law to police unfair, deceptive, and abusive practices involving commercial financing provided to small businesses, nonprofits, and family farms. DFPI’s regulations implementing that authority became effective in 2023, making California an early mover in applying consumer-style UDAAP concepts to commercial financing.
AB 2116 takes the next step by placing many of the providers and brokers offering those products directly within a licensing and examination regime.
What Should Commercial Finance Companies Do Now?
Although January 1, 2028 may seem distant, companies potentially covered by AB 2116 should not wait until late 2027 to begin preparing.
Among other things, providers and brokers should:
- Determine which products and transactions fall within the $500,000 threshold and the statutory definition of commercial financing.
- Determine whether their customers qualify as covered small businesses.
- Analyze whether their activities constitute commercial financing brokerage services, including when arranging loans through already licensed lenders.
- Assess whether out-of-state operations involving California-based businesses are subject to the law.
- Review existing agreements for provisions concerning confessions of judgment, powers of attorney, confidentiality, and other contractual restrictions.
- Review compensation arrangements with brokers, referral sources, lead generators, and other intermediaries.
- Prepare books, records, and compliance policies for potential DFPI examinations.
- Monitor DFPI rulemaking, which must be completed by January 1, 2028.
- Determine whether existing California licenses can be used or whether a separate commercial financing provider or broker license will be required.
Conclusion
AB 2116 marks a substantial expansion of California’s regulation of commercial finance.
The law brings a number of alternative financing products and the companies that provide or broker them into the California Financing Law’s licensing, examination, and enforcement framework. The broker provisions are especially broad: they cover brokers arranging newly regulated alternative products as well as brokers arranging loans through lenders that were already subject to California licensing requirements.
The legislation also imposes substantive restrictions on financing agreements, creates new obligations for commercial financing brokers, and gives the DFPI and potentially affected borrowers meaningful enforcement tools.
With the law becoming operative in 2028, the next important phase will be the DFPI’s rulemaking. The details of those regulations will determine many of the practical questions that AB 2116 leaves open, including the licensing process, the treatment of out-of-state providers, examination procedures, and how the statute will be applied to the increasingly diverse array of commercial financing products available to small businesses. On February 19, 2026, Alan Kaplinsky, host of our Consumer Finance Monitor weekly podcast show interviewed Louis Caditz-Peck, Executive Director of the RBLC, about the proliferation of state small business lending protection statutes (including California), the policy debates driving them, and what they mean for lenders, fintechs, banks, and small business borrowers.