California's SB 362: The End of "Factor Rate" and the Dawn of APR-Everywhere

California just fundamentally changed how alternative lenders can talk about pricing. Senate Bill 362, effective January 1, 2026, transforms the state's Commercial Financing Disclosures Law from a single-point disclosure regime into a continuous, APR-anchored communication standard for all commercial financing offers of $500,000 or less.

The core change is deceptively simple but operationally massive: anytime you quote a price, fee, or financing amount after extending a specific offer, you must also state the APR. Not just on the disclosure form. Every time. Every channel.

• "Factor rate" terminology is effectively dead in California. SB 362 prohibits using "rate" to describe any cost metric unless it's an APR calculated under DFPI regulations (10 CCR § 940). That "1.3 factor" quote your sales team uses daily? Non-compliant as of January 1.¹

• Continuous APR disclosure requirement. After extending a specific offer, every communication that mentions payment amounts, fees, total payback, or any pricing metric must include the corresponding APR using "annual percentage rate" or "APR."²

• Scope: $500,000 or less. The law applies to commercial financing offers at or below this threshold—which covers the vast majority of alternative lending volume.³

• Dual enforcement teeth. Violations constitute either a California Financing Law breach (for CFL-licensed providers) or an unfair, deceptive, or abusive act under the California Consumer Financial Protection Law—giving regulators and plaintiffs multiple avenues.⁴

• Brokers and ISOs are covered. The law applies to "providers," which includes brokers presenting specific offers on behalf of funders.⁵

The practical implication: every follow-up call, email, text message, or revised quote that mentions money after an offer exists becomes a compliance event. Sales teams, CRM templates, broker training—everything touching California merchants needs an overhaul before New Year's Day.

What Alternative Business Lenders Need to Know

Why This Is Different From the Original CFDL

California's original Commercial Financing Disclosure Law, which took full effect in June 2024, required providers to deliver a standardized disclosure form when extending a specific offer. That form includes APR, total repayment amount, prepayment policies, and other key terms. Most lenders have already built compliance workflows around generating these disclosures.

SB 362 is categorically different. It's not about what you put on the form—it's about what you say everywhere else.

Under the new law, whenever a provider "states a charge, pricing metric, or financing amount" for a specific offer "at any point in the application process," they must simultaneously state the APR.² This isn't a clarification or technical amendment. It transforms every pricing conversation into a regulated communication.

Consider your current workflow: A broker calls a merchant to discuss a revised offer. "We can get you $75,000, daily payment of $425, payback of $97,500." Under SB 362, that sentence is non-compliant unless the broker adds "at an APR of X%." The same applies to follow-up emails, text messages, portal messages, and any revised quotes.

The "Factor Rate" Problem

Alternative lenders have used factor rate terminology for decades because it maps intuitively to product mechanics. A "1.3 factor" on $100,000 means $130,000 total payback. Simple. Clean. Universally understood in the industry.

SB 362 makes this vocabulary illegal in California for offers under $500,000.

The statute prohibits using "rate" to describe a cost metric unless that rate is an APR calculated under DFPI regulations.⁴ It also prohibits using "interest" or "rate" in any way that could "reasonably mislead" a recipient about financing costs.³

Factor rate doesn't qualify. Neither does "cents on the dollar," "buy rate," or other industry shorthand that doesn't compute to an APR. If your sales scripts, broker training materials, or CRM templates use these terms for California deals, they need to be rewritten.

Enforcement Reality: What DFPI Scrutiny Actually Looks Like

The article would be incomplete without addressing what enforcement actually means for your risk calculus. Here's what we know:

DFPI's budget and staffing picture: The 2025-26 California Legislative Analyst's Office report reveals DFPI operates with approximately 878 positions and a $177 million budget.⁷ More importantly, the Financial Protection Fund—which covers enforcement of consumer financial protection laws including CCFPL—is projected to become insolvent by late 2025-26. An independent fiscal study found structural deficits dating to 2020-21, driven by static fee levels and startup costs for new programs.

What does this mean practically? DFPI is stretched. They're not going to audit every funder proactively. But they don't need to.

Complaint-driven enforcement model: DFPI's enforcement pattern across financial services has been predominantly complaint-driven rather than proactive audit-based. Recent consent orders—$1 million against a consumer lender for Fair Access to Credit Act violations, $675,000 against a crypto kiosk operator, $300,000 against Coinme for digital asset law violations—share a common thread: they followed investigations triggered by consumer complaints or examination findings, not random audits.

The fine structure: Under the California Financing Law, violations can trigger administrative penalties up to $10,000 per violation.⁶ For high-volume funders, the math gets ugly fast. If you funded 200 California merchants last year and half had non-compliant communications in the file, theoretical exposure reaches $1 million before counting restitution or legal fees. DFPI also has authority to suspend or revoke CFL licenses—effectively a death sentence for California operations.

The SBFA litigation backdrop: The Small Business Finance Association's constitutional challenge to the original CFDL failed when a federal court granted DFPI summary judgment in December 2023.⁸ The Ninth Circuit appeal is pending, but DFPI is enforcing in the meantime. SB 362 builds on that foundation. Don't expect judicial relief.

Bottom line on enforcement: DFPI probably won't find you through proactive audits. But one merchant complaint, one disgruntled broker, one examination triggered by something unrelated—and suddenly your entire California file is under scrutiny. The continuous disclosure requirement creates a much larger attack surface than the original CFDL. Every pricing communication is now discoverable evidence.

The Strategic Question: Is California Still Worth It?

This is the elephant in the room that most compliance-focused articles ignore. SB 362 isn't just an operational challenge—it's a strategic inflection point. Some funders will need to decide whether California volume justifies the compliance investment.

Option 1: Exit California

The cleanest solution operationally. No compliance costs, no enforcement risk, no retraining. Some smaller shops will take this path, particularly those with California representing less than 10-15% of volume.

The problem: California is roughly 12-14% of the U.S. small business population and an even larger share of MCA volume given the state's retail and restaurant density. Walking away means ceding that market to competitors who stay. If those competitors figure out compliant operations, they'll have a structural advantage when you eventually want back in.

Option 2: Raise Pricing to Cover Compliance Costs

The compliance lift isn't free. System changes, template rewrites, broker retraining, ongoing monitoring, legal review—we estimate $15,000-$40,000 in one-time implementation costs for a mid-sized funder, plus ongoing costs of $50-$150 per California deal for APR calculation, documentation, and audit trail maintenance.

On a $50,000 advance with a 1.35 factor, that's 10-30 basis points of margin erosion. You can either absorb it or pass it through. Passing it through means your California pricing becomes less competitive against funders who've already amortized their compliance investment or who have scale advantages.

Option 3: Absorb and Compete

Treat compliance as table stakes and invest in doing it well. This is the play for funders with meaningful California volume and the operational capacity to execute.

The upside: competitors who exit or botch compliance hand you market share. The California small business market isn't shrinking. Someone will serve it. If you can be the compliant, scaled provider while others are scrambling, you win.

The downside: you're making a bet that enforcement is real enough to clear out non-compliant competitors but not so aggressive that minor implementation hiccups sink you. That's probably the right bet, but it's still a bet.

Our read: Funders doing more than $5 million annually in California volume should invest in compliance rather than exit. The market is too large to abandon, and first-mover compliance advantage is real. Funders below that threshold need to run the numbers carefully—the fixed costs of compliance may not amortize well against smaller volume.

Operational Implications: The Compliance Surface Area Explodes

The original CFDL created a single compliance checkpoint: generate the correct disclosure when extending an offer. You could build that into your LOS and largely automate it.

SB 362 creates compliance checkpoints everywhere.

Sales communications: Every phone call, email, or text that mentions pricing after an offer exists needs APR. This isn't something you can automate without significant system changes. Sales reps need training to instinctively pair any number with the corresponding APR.

Broker/ISO coordination: Your ISO partners are "providers" under the statute when they present offers on your behalf.⁵ Their compliance is your problem. If a broker quotes a revised payment amount without APR, you may both have exposure.

CRM and template systems: Email templates, SMS scripts, portal messaging—anything that auto-populates pricing information needs to also auto-populate APR. This requires system changes, not just policy updates.

Documentation and record-keeping: With every pricing communication now a potential compliance event, your record retention practices need to capture these exchanges in case of regulatory inquiry or litigation.

The 15-Month Clock

SB 362 becomes effective January 1, 2026. That sounds like plenty of time until you inventory what needs to change:

Immediate (Q1 2025):

• Audit all California-facing sales scripts for factor rate and non-APR terminology

• Identify all communication templates (email, SMS, portal) that include pricing

• Assess broker/ISO training materials and agreements

• Run the strategic analysis: stay, exit, or price-adjust

Near-term (Q2-Q3 2025):

• Implement system changes to auto-populate APR in communications

• Revise broker agreements to require APR compliance and indemnification

• Train sales teams on new communication standards

• Update CRM systems and templates

Pre-launch (Q4 2025):

• Test revised workflows with compliance counsel review

• Audit for remaining factor rate language

• Establish monitoring for ongoing compliance

• Build documentation trail for potential DFPI defense

The funders who wait until Q4 to start will be scrambling through the holidays to make deadline. Don't be those funders.

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