Newsom Signs AB 2116, Requiring Licenses for MCA and Factoring Deals Up to $500,000
A California small-business financing agreement signed on or after January 1, 2028 is not enforceable unless the funder is licensed or has a complete application pending, a route that may not be open until DFPI accepts applications.1 That rule is the core of AB 2116, which Governor Gavin Newsom signed on September 30.2
From July 1, 2028, anyone who provides or brokers commercial financing to a California small business on an offer of $500,000 or less will need that license from the Department of Financial Protection and Innovation (DFPI) under the California Financing Law.1 Merchant cash advances come in through the definition of an accounts receivable purchase, alongside factoring, asset-based lending, commercial loans and lease financing.3 4 The bill was chaptered the same day as Chapter 823 of the Statutes of 2026.5
New contract and broker rules: no confession of judgment or power of attorney before default, no clauses that stop a merchant from sharing its terms, and brokers must post their average and maximum APRs.
A usury benefit for licensees: licensees join the California Financing Law's exempt class, which Hudson Cook reads as ending loan-recharacterization usury risk for licensed providers.6
What Alternative Business Lenders Need to Know
Which deals and which businesses does AB 2116 cover?
The new chapter covers accounts receivable purchases including factoring, asset-based lending, commercial loans, open-end credit plans and lease financing.1 The words "merchant cash advance" do not appear; the MCA comes in through Financial Code Section 22800, which counts a sale of "cash receipts that are owed to the recipient or are collected by the recipient during a specified period or in a specified amount" as an accounts receivable purchase.3 The Senate Judiciary analysis lists "sales-based financing, like merchant advances" among the products the bill reaches.4
The recipient must be a small business with annual gross receipts of no more than $16 million, a figure adjusted every two years, and the specific offer must be $500,000 or less.1 Among other carve-outs, Section 22656 excludes financing secured by real property and a person that makes one or fewer covered deals in California in 12 months.1 A funder that writes $750,000 advances to $30 million companies is outside this chapter; a funder that writes $40,000 advances to restaurants is inside it.
What happens to a contract if the funder is not licensed?
The framework becomes operative January 1, 2028. From July 1, 2028, no one may act as a commercial financing provider or broker without a license, with one bridge: a person that files a complete application by July 1, 2028 may keep operating while the application is pending.1 A separate rule ties the paper to the license. A commercial financing agreement "is not enforceable" unless the provider is licensed, has a complete application pending, or entered the transaction before January 1, 2028.
The exposure does not wait for a default. A funder that collects by ACH and never sues still finances its book, and if a warehouse line's eligibility criteria or receivable representations require enforceable contracts, California paper written without a license or a pending application after January 1, 2028 may not qualify. That is Beyond Banks' reading of how the statute meets a credit agreement; AB 2116 itself says nothing about funding lines.
What does a license require, and what else can DFPI do?
Licensees must keep a $25,000 surety bond and at least $25,000 of net worth, and new applicants submit fingerprints for state and FBI criminal history checks.1
Starting March 15, 2029, providers file, with limited exceptions, an annual report of deal counts, dollars and APR ranges by product and deal size, drawn, under Section 22660, from the disclosures they already make under California's commercial financing disclosure regulations.1 Because those disclosures already carry an estimated APR for each covered offer, in our read that makes the report largely an aggregation job for funders, and the newer burden falls on brokers that have never published pricing.
Unenforceability is not the only consequence: under Section 22712 the commissioner can order an unlicensed person to desist and seek refunds, restitution or damages, and under Section 22714 must suspend or revoke a license on specified findings.1
What changes inside the contract and the broker relationship?
Providers and brokers can no longer take a confession of judgment or any power of attorney before a default.1 A deal a court finds unconscionable now counts as a violation of the licensing law, and contracts may not include clauses that limit a small business from disclosing what it learns from the relationship, including the terms of the product. A new standard also bars unlawful, unfair, deceptive or abusive acts or practices.
Brokers get their own license and a new definition. A person is a commercial financing broker if it transmits a prospect's sensitive data, such as bank statements, a credit score or a taxpayer identification number, to a provider with the expectation of compensation, takes part in negotiating a deal, communicates a provider's approval decision, or charges the business a fee for help with an application.1 6 Each broker must also "clearly and conspicuously display" on its website the average and maximum annual percentage rates of the deals it facilitated in the most recent calendar year.
Why does a license change the usury question?
Hudson Cook describes California's constitutional usury limit as 10% per year, with the California Financing Law creating an exempt class of lenders.6 Section 22002 of the amended law says that class "includes any person licensed under this division."1 An MCA is structured as a purchase rather than a loan, and funders have had to defend that form against claims that a deal is really a loan. Hudson Cook reads AB 2116 as extending the exemption to any licensee "regardless of the form of a transaction," so that "recharacterization will cease to be a concern for a CFL-licensed commercial financing provider." That is a law firm's reading of the statute, not a court ruling.
How did a bill that stalled three times pass without a no vote?
The bill drew no recorded no votes: 38-0 in the Senate on the Legislature's vote record, and 76-0 in the Assembly on final concurrence in August.7 5 The Senate Judiciary analysis calls it the fourth attempt in three years, after SB 869, SB 1482 and SB 728 stalled, and says the difference is that "the commercial financing industry is generally in favor" of licensing under the existing California Financing Law.4 Supporters include small-business funders Kapitus and Rapid Finance; as of the June 30 hearing, the Innovative Lending Platform Association and the Revenue Based Finance Coalition were opposed.4
The bill also changed shape: the April version was a registration bill, and by June it had become licensing under the California Financing Law.8 It joins Vermont's licensing law, effective July 1, 2027, which exempts deals of $1 million or more, and Texas's Commercial Sales Based Finance registration, whose applications moved to NMLS on September 1, 2026.9 10
What should funders, factors and brokers do before July 2028?
Five steps:
Size the exposure: take your current California run rate for deals of $500,000 or less to merchants with $16 million or less of gross receipts, project it into 2028, and flag the carve-outs above.1
Check the funding line: read your warehouse or credit facility's eligibility criteria and receivable representations against the January 1, 2028 enforceability rule, and raise it with your capital provider before they raise it with you.
Clean the paper early: pull pre-default confessions of judgment, powers of attorney and nondisclosure clauses from California contracts before 2028, rather than at the deadline.
Watch for the application window: start the application the day DFPI publishes the form, and have the bond, net-worth figures and fingerprints ready to file on the first day.
Brokers and ISO rosters: build the data to calculate average and maximum APR for every facilitated deal, and list which of your ISOs will need a broker license.
These are Beyond Banks' suggestions, not legal advice; the statute leaves the application's form and content to the commissioner's rule or order.
What the record does not yet show:
Application timing: on Beyond Banks' reading, the pending-application route in Section 22658 points to Section 22100.6, which takes effect July 1, 2028, so whether a pending application can cover paper written from January through June depends on when DFPI opens applications.
Choice of law: AB 2116 does not address it, and courts do not always honor a chosen state's law when it conflicts with the policy of the borrower's state, so ask counsel before relying on a New York clause for a California merchant.
Existing licenses: the commercial financing provider license is its own license type, so a CFL lender license held today does not, on the text, settle coverage of non-loan products.
Broker commissions: a licensed provider may broker at its licensed location after written notice to the commissioner, but the bill does not say whether funders may keep paying brokers who have not yet obtained the new license.
Renewals: whether a 2028 renewal or amendment of a pre-2028 deal counts as a new transaction under Section 22658.
Recovery: what a funder can still recover when an agreement is unenforceable.
Our Opinion
Treat California licensing as a 2027 project, not a mid-2028 one. The enforceability rule starts on January 1, 2028, and we expect capital providers to ask about it first, because a contract that cannot be enforced is a weak receivable to lend against.
The cost is real: a bond, a net-worth floor, the commissioner's examination authority, conduct rules and an annual APR report.1 In return, a funder that is licensed or has a complete application pending keeps enforceable California paper and, if Hudson Cook's reading holds, no longer has to defend the purchase form of an MCA against usury recharacterization. A competitor that skips the license gets neither. That trade is why we think the funders who backed licensing this time were right.
Brokers, in our view, face the bigger change: publishing an average and maximum APR is new for them, and the first readers will likely be the funders that vet them and DFPI. We expect that page to sort ISOs faster than any rule DFPI writes: a broker whose posted maximum looks out of line is likely to lose funder relationships before a regulator ever calls.
1-Minute Video: Why Most Lenders Get California Entity Verification Wrong
Two California Agencies, Two Kinds of Suspension
California entity verification is split between its two sources: the Secretary of State and the Franchise Tax Board can each suspend a business on their own, so a lender needs to know which agency acted, and the video shows why a Franchise Tax Board suspension on its own is routed to manual review rather than an automatic decline.
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SBA's SOP 50 10 8.1, which applies to loans numbered on or after October 1, says a sales-based repayment agreement such as a merchant cash advance is "only eligible for refinancing if the original agreement has been converted to a term loan, has amortized for at least 24 months, and no additional Agreements have been implemented since the conversion of the prior agreement(s)."11 12 Active advances and factoring agreements stay ineligible, and the new loan must still meet SBA's 10 percent improvement test on the installment payment. The 2025 version said flatly that merchant cash advances and factoring agreements are not eligible for refinancing.13 deBanked suggests the new language may close a loophole in which an MCA is converted to a term loan and refinanced immediately.14 Our read: workout teams should record each conversion date and keep the converted term loan as the merchant's only agreement, so a merchant that later seeks an SBA refinance can document eligibility.
Parafin said on September 30 that it agreed to be acquired by Stripe; terms were not disclosed, and the deal needs customary closing conditions, including any required regulatory clearances.15 Parafin says it has funded more than $3 billion to more than 60,000 small businesses through platforms including DoorDash and Amazon, with repayments that flex with sales. Stripe says more than 18,000 platforms build on it.16 17 FunderIntel argues that embedded offers absorb the small-file end of the market that never calls a broker.18 Our read: if FunderIntel is right, small-ticket merchants who never reached an ISO will likely stay inside platforms, so ISO-sourced funders should not plan on platform merchants for small-file growth; larger and structured files stay contestable.
Experian launched Cashflow Attributes for commercial lenders on September 29, turning business checking data and permissioned bank-account data into more than 500 attributes on liquidity, revenue trends, operating expenses, debt exposure and repayment capacity, built with technology from Slope.19 20 Experian says its preliminary analysis shows up to a 24% lift in predictive performance for thin-file businesses when the attributes are paired with commercial credit data; that figure is the company's own. Our read: if lenders adopt it, bank-statement underwriting, the working method of many revenue-based funders, becomes a packaged bureau product that banks can plug into their own approvals. Funders that compete on bank-statement speed should test what their own analysis adds beyond the bureau attributes.
Sources
1 California Legislature | AB 2116 (Schiavo), Commercial financing, chaptered text, Chapter 823, Statutes of 2026
2 Office of Governor Gavin Newsom | Governor Newsom signs historic law to stop big business from shutting out competition, cuts red tape to speed up business permitting (Sept. 30, 2026)
3 California Legislature | Financial Code Section 22800 (definitions, Commercial Financing Disclosures)
4 California Senate Judiciary Committee | AB 2116 (Schiavo) analysis, hearing June 30, 2026
5 California Legislature | AB 2116 bill history
6 Hudson Cook | Previously Shelved California Commercial Finance Licensing Bill Poised to Become Law
7 California Legislature | AB 2116 floor and committee votes
8 California Assembly Banking and Finance Committee | AB 2116 (Schiavo) analysis, hearing April 23, 2026
9 Husch Blackwell | Vermont Folds Sales-Based Financing and Factoring Into Its Licensing Regime
10 Texas Office of Consumer Credit Commissioner | Commercial Sales Based Finance
11 U.S. Small Business Administration | Information Notice 5000-880695, Issuance of SOP 50 10 8.1
12 U.S. Small Business Administration | SOP 50 10 8.1, Lender and Development Company Loan Programs, effective Oct. 1, 2026
13 U.S. Small Business Administration | SOP 50 10 8, effective June 1, 2025
14 deBanked | How to Pay Off an MCA With an SBA Under The New Rules Effective Oct 1
15 Parafin | Parafin is joining Stripe
16 The Paypers | Stripe agrees to acquire embedded credit provider Parafin
17 PYMNTS | Stripe to Buy Parafin to Scale Embedded Finance Across 18,000 Platforms
18 FunderIntel | Stripe Is Buying Parafin: Embedded SMB Lending Just Consolidated at the Top
19 Open Banking Expo | Experian launches cashflow attributes for commercial lenders
20 The Paypers | Experian launches cashflow tool for lenders
