REGULATORY UPDATE

When Your Funder Needs a State License: California AB 2116 and the New Map of Commercial Financing Regulation

California has enacted the broadest commercial financing licensing law in the country. Here is what AB 2116 covers, which dates matter, and what borrowers should consider between now and July 2028.

On September 30, 2026, Governor Gavin Newsom signed AB 2116 into law as Chapter 823, Statutes of 2026 (California Legislature). The law pulls merchant cash advance, factoring, asset-based lending, commercial loans, business lines of credit, and certain equipment leases into the California Financing Law and requires the companies that provide and broker them to hold a license from the California Department of Financial Protection and Innovation. The governor’s office framed the purpose as protecting small businesses from abusive financial practices by unscrupulous financing companies (gov.ca.gov).

If your business uses any of these products in California, nothing changes overnight. The new framework becomes operative on January 1, 2028, and unlicensed providers and brokers are prohibited from operating beginning July 1, 2028. That runway shapes what borrowers should do now: understand what is covered, ask providers where they stand, and keep enough financing options open that one company’s compliance decision never becomes your capital cliff.

What is California AB 2116?

California AB 2116 is a commercial financing law signed on September 30, 2026 that requires providers and brokers of covered business-purpose financing to hold a license from the California Department of Financial Protection and Innovation (DFPI) beginning July 1, 2028. It adds a new chapter called Commercial Financing for Small Businesses to the California Financing Law (CFL), the statute that already licenses the state’s consumer and commercial lenders and brokers (DFPI).

Assemblymember Pilar Schiavo introduced the bill on February 18, 2026, and it ended the session with a final Assembly vote of 76 to 0 (bill history). The path was less orderly than the vote. The bill spent time on the suspense file over state-cost concerns, and California’s Department of Finance opposed it on budget-impact grounds before the legislature passed it anyway, according to Hudson Cook’s analysis.

Two design choices shape everything that follows. First, California chose licensing rather than the lighter registration model that Virginia and Connecticut use for sales-based financing. A license applicant must clear fingerprint-based background checks, meet minimum financial requirements, post a surety bond, and submit to ongoing supervision and examination. Second, the product sweep is wide. Where most states regulate sales-based financing only, AB 2116 reaches five product families, which makes it the broadest commercial financing licensing regime in the country and, per trade publisher FunderIntel, the second state licensing program after Vermont’s, in a market roughly fifty times the size.

Which financing products does AB 2116 cover?

AB 2116 defines commercial financing as an accounts receivable purchase transaction, including factoring, an asset-based lending transaction, a commercial loan, a commercial open-end credit plan, or lease financing intended by the recipient for use primarily for other than personal, family, or household purposes (enrolled text, Financial Code section 22655). The new chapter borrows its product definitions from California’s commercial financing disclosure law (Financial Code section 22800), so the categories will look familiar to anyone who has read the state’s disclosure requirements:

• Accounts receivable purchase transactions, including factoring. Agreements that require a business to forward or otherwise sell receivables, payment intangibles, or cash receipts to the funder. Merchant cash advance and other revenue-purchase products sit in this family, and Hudson Cook confirms the license requirement reaches factoring and revenue-based financing providers and brokers (Hudson Cook). Our plain-English guide to merchant cash advance explains how these deals price and repay.
• Asset-based lending. Advances made from time to time, contingent on payments the business’s customers owe it for goods or services, the classic borrowing-base structure. Our asset-based lending overview explains the mechanics.
• Commercial loans. Business-purpose loans with a principal amount of $5,000 or more (section 22800).
• Commercial open-end credit plans. Business lines of credit with revolving draws, charges computed on unpaid balances, and the privilege of paying the account in full at any time.
• Lease financing. Lease financing means a lease of goods that includes a purchase option creating a security interest in the goods, the structure behind a typical dollar-buyout equipment lease (section 22800). True operating leases without that purchase option fall outside the definition. Our equipment financing guide covers both structures.

Two thresholds narrow the field. Under the law, a recipient is a small business or small business owner presented with a specific commercial financing offer of $500,000 or less, and a small business is one with annual gross receipts of $16 million or less, a threshold adjusted for inflation every two years. Providers may rely on the business’s written representations on both figures (enrolled text, section 22655). Offers above the ceiling, and financing for larger companies, sit outside the new chapter. The disclosure law enacted in 2018 uses the same $500,000 offer ceiling without the gross-receipts test, and it continues to apply on its own terms (section 22800).

The license requirement reaches two roles. A commercial financing provider is a person who extends a specific offer of covered financing, and the definition expressly includes a nondepository institution that arranges financing from a bank partner through an online lending platform under a written agreement (section 22655). A commercial financing broker is a person who, for compensation, transmits an applicant’s sensitive financial data to providers, refers applicants under criteria agreements, participates in negotiations, advises on deals using that data, prepares financing documents, communicates approval decisions, or charges applicants fees. Clerical support, credit reporting, and distributing a provider’s marketing materials do not, by themselves, make someone a broker (enrolled text, section 22655).

That definition matters to us directly. Capital Source Group is already licensed as a commercial financing broker, and we will spend the runway mapping California’s new requirements against our own licensure and tracking the DFPI rulemaking that will set the application mechanics. One caution applies to every company in that position, and it includes us: an existing broker license does not automatically satisfy AB 2116. The law creates a distinct California credential, and how current licensees transition is one of the open questions industry observers expect rulemaking to answer (FunderIntel).

Existing exemptions narrow the field further. Banks and other depository institutions are already outside the California Financing Law (Financial Code section 22050), and the new chapter exempts commercial financing secured by real property, certain vehicle dealer and rental company transactions of $50,000 or more, persons making one or fewer covered transactions in California in a 12-month period, and persons making five or fewer such transactions in a 12-month period that are incidental to their business (enrolled text, section 22656).

What does the commercial financing license require?

Licensing carries entry requirements and ongoing obligations. Applicants file fingerprints for state and federal criminal history checks, and the DFPI investigates the company, its principal officers, and anyone owning or controlling 10 percent or more of it (enrolled text, sections 22101, 22101.5, and 22105). The statutory application cost is a $100 investigation fee plus a $200 application fee, along with fingerprint processing costs (section 22103). The commissioner must issue a license or file a statement of issues within 60 days of a complete application (section 22109).

Once licensed, a provider or broker must maintain a net worth of at least $25,000 at all times (section 22104) and a $25,000 surety bond that can be used for losses borrowers or recipients suffer from noncompliance (section 22112). Licensees keep books and records for three years, file annual reports by March 15, pay annual assessments of at least $250 per licensed location, disclose their license in advertising, and submit to examination (sections 22157, 22159, 22107, 22162, and 22701). The DFPI already runs its existing CFL annual reports on the same March 15 clock (DFPI).

The chapter also imports conduct rules long familiar in consumer finance. Providers and brokers may not take a confession of judgment or a power of attorney before a default, contracts may not gag a business from disclosing the provider’s terms, unconscionable transactions violate the law under the standard in Civil Code section 1670.5, and unfair, deceptive, or abusive acts and practices are prohibited (sections 22659 and 22661). Brokers must display on their websites the average and maximum annual percentage rates for the deals they facilitated in the most recent calendar year (section 22659). A license can be suspended or revoked for repeated failures to consider whether the business can repay on the agreed terms (section 22714).

Beginning in 2029, licensed providers file annual electronic reports breaking down transaction counts and dollar volume by product type and size band, from $10,000 or less up to over $250,000 through $500,000, together with minimum, maximum, average, and median APRs for each band (enrolled text, section 22660). When those filings begin, California regulators will hold structured rate and volume data on merchant cash advance and factoring pricing in the country’s largest small-business market.

One more change matters on the provider side. Hudson Cook notes that AB 2116 extends the CFL’s exemption from California’s constitutional usury limit to licensees regardless of the form of the transaction, which removes a long-running recharacterization worry for licensed commercial financiers (Hudson Cook).

Key dates for California borrowers and providers

• September 30, 2026. Governor Newsom signs AB 2116, chaptered as Chapter 823, Statutes of 2026 (bill history).
• Now through 2027. The DFPI writes implementing regulations. Application mechanics are not yet published, and industry observers expect open scope questions, including how existing CFL licensees transition, to be settled in rulemaking (FunderIntel).
• January 1, 2028. The Commercial Financing for Small Businesses chapter becomes operative (section 22662).
• July 1, 2028. Covered providers and brokers must hold a license. A person that submitted a complete application on or before this date may keep operating while awaiting approval or denial (enrolled text, section 22100.6).
• March 15, 2029. The first annual volume and rate reports are due (section 22660).

What happens to contracts with an unlicensed provider?

Beginning in 2028, California ties contract enforceability to licensing status. New Financial Code section 22658 provides that a commercial financing agreement is not enforceable unless the provider is licensed, has a complete application pending under the transition rule, or the transaction was entered into before January 1, 2028 (enrolled text).

Read the edges carefully. The provision does not declare every contract with an unlicensed counterparty automatically void, it does not reach transactions entered before 2028, and it does not apply to exempt parties or deals outside the chapter’s scope, such as offers above $500,000 or financing secured by real property. No court has interpreted section 22658 yet, and the DFPI’s implementing regulations are unwritten. Anyone on either side of a covered agreement who might rely on enforceability, in either direction, should get counsel’s read on the specific contract.

Enforceability is not the only consequence. The DFPI can order an unlicensed operator to desist and can pursue refunds, restitution, disgorgement, or damages on behalf of injured businesses (section 22712), and licensees that violate the law face suspension or revocation (section 22714). For funders, a compliance miss becomes a collections problem, as FunderIntel puts it. For borrowers, the same clause works as protection: a provider that wants collectible paper has a hard incentive to stay licensed and stay near its regulator.

What should California business borrowers do now?

There is no emergency here, and a few sensible moves. The duties fall on providers and brokers, not on the businesses that borrow from them, and transactions entered into before January 1, 2028 are untouched by the enforceability rule (section 22658).

• Ask current funders and brokers where they stand. A company that wants to keep serving California past the deadline must have a complete application on file by July 1, 2028, and multistate operators that already hold registrations elsewhere have compliance machinery they can point to. Ask a broker the same question you would ask a funder: where are you licensed today, and what is your California plan? Capital Source Group holds a commercial financing broker license, and the runway to 2028 is on our own compliance calendar.
• Mind the renewal calendar. If a facility renews, extends, or redraws after the operative dates, the provider’s licensing status becomes part of your diligence. How a specific agreement treats renewals is a contract question worth raising with counsel early.
• Check rosters before committing. The DFPI already publishes a searchable listing of CFL licensees, and the commercial financing program joins it once licensing stands up (DFPI). Rosters move: Virginia’s sales-based financing registrations fell from 238 to 185 on September 15, 2026 when 55 companies let registrations lapse at renewal, per FunderIntel. That is an observation about a registration state, not a prediction about California.
• Separate the legal requirement from market speculation. AB 2116 does not ban merchant cash advance, factoring, or any other covered product, and nobody can responsibly predict that it will shrink availability or raise prices. Individual providers will make individual decisions about licensing, and borrowers keep the ability to work with the ones that stay.

The transparency dividend is real. Broker APR posting arrives with the law, and from 2029 the state collects minimum, maximum, average, and median rate data by product. Over time, comparing the true cost of a merchant cash advance against factoring or a term loan gets easier in California (sections 22659 and 22660).

What financing options remain if your preferred route changes?

Regulatory maps will keep shifting. A business with more than one financing route does not experience a single state’s rule change as a funding cliff. If a preferred product or provider becomes unavailable in California, the alternatives worth evaluating include:

Two honest caveats. Availability varies by product, provider, and underwriting, and Capital Source and its affiliate Stretch Finance do not offer every product in every jurisdiction, so confirm what is actually available for your situation. All California financing activity, including loans and advances, is performed through Stretch Finance, LLC (NMLS ID: 2627434), an affiliate of Capital Source. What does not vary is the approach: we structure capital around the deal, and part of that work is tracking which structures remain open as the rules move.

How do other states regulate commercial financing?

California joins a patchwork rather than creating one. Seven states now have licensing or registration regimes covering some or all commercial financing, and they disagree about products, thresholds, and deadlines:

• California. Full licensing of providers and brokers across five product families, for offers of $500,000 or less to businesses with gross receipts of $16 million or less, with a July 1, 2028 licensing deadline (enrolled text).
• Vermont. H.648, enacted in June 2026, adds licensing, disclosure, and account-debiting restrictions for sales-based financing and factoring providers, with the commercial financing provisions effective July 1, 2027 under the Department of Financial Regulation (Mayer Brown).
• Texas. HB 700 requires commercial sales-based financing providers and brokers to register with the Office of Consumer Credit Commissioner by December 31, 2026, with annual renewals after that. The law has been effective since September 2025 (Texas Legislature; Venable).
• Virginia. Sales-based financing providers and brokers have registered with the State Corporation Commission since November 1, 2022, paying a $1,000 initial fee and a $500 annual renewal (Code of Virginia section 6.2-2230).
• Connecticut. A 2023 act requires disclosures and registration with the Department of Banking for sales-based financing of $250,000 or less, with registration running since October 1, 2024 (CounselorLibrary).
• Missouri. A 2024 law requires brokers to register with the Division of Finance and post a $10,000 surety bond, and it imposes disclosure duties on providers (Mayer Brown).
• Utah. Providers have registered with the Department of Financial Institutions through the Nationwide Multistate Licensing System since January 1, 2023 (Mayer Brown), and FunderIntel describes Utah’s registration as extending across commercial financing, factoring included (FunderIntel).

The five-year pattern runs from disclosure to registration to licensing, with Vermont and California at the licensing end of it (FunderIntel). The map keeps moving, so verify current requirements with each state’s regulator before relying on any summary, including this one.

Key takeaways

• One law, five product families. AB 2116 covers accounts receivable purchase transactions (including factoring and merchant cash advance style deals), asset-based lending, commercial loans of $5,000 or more, open-end business credit, and certain lease financing.
• Two dates carry the weight. The framework becomes operative January 1, 2028, and unlicensed covered activity is prohibited from July 1, 2028, with a pending-application window for those who file on time.
• Licensing is heavy. Fingerprints and background checks, a $25,000 minimum net worth, a $25,000 surety bond, annual reports, examinations, conduct rules, and rate and volume data filings beginning in 2029.
• Enforceability rides on licensing status. Covered agreements entered from 2028 are not enforceable unless the provider is licensed or has a timely application pending, while pre-2028 transactions are untouched. Run any specific contract past an attorney.
• California is the broadest, not alone. Vermont licenses from July 2027; Texas, Virginia, Connecticut, and Utah register; Missouri registers brokers only.
• Options outlast rule changes. Term loans, working capital lines, asset-based lending, factoring, equipment financing, bridge structures, and combinations keep borrowers moving even if one provider exits a state.

Frequently asked questions

Sources

• California Legislature, AB 2116 (Schiavo), Commercial financing, enrolled text (August 24, 2026).
• California Legislature, AB 2116 status and history (chaptered September 30, 2026 as Chapter 823, Statutes of 2026).
• Office of Governor Gavin Newsom, Governor Newsom signs historic law to stop big business from shutting out competition (September 30, 2026).
• California Department of Financial Protection and Innovation, Consumer and Commercial Loans, California Financing Law.
• California Financial Code section 22800, Commercial Financing Disclosures definitions, and section 22050, California Financing Law exemptions.
• Eric D. Mulligan, Hudson Cook LLP, Previously Shelved California Commercial Finance Licensing Bill Poised to Become Law (August 31, 2026).
• FunderIntel, Newsom Signs AB 2116: California Will License Commercial Finance (September 30, 2026).
• CounselorLibrary, alert on AB 2116 (August 26, 2026), and alert on Connecticut registration under Public Act 23-158.
• Mayer Brown, Vermont Passes Commercial Financing Licensing Bill (July 2026).
• Texas Legislature, HB 700 bill analysis (89R); Venable LLP, State Commercial Financing Disclosure Laws: Recent Developments and Compliance Considerations (March 2026).
• Code of Virginia, section 6.2-2230, registration of sales-based financing providers and brokers.
• Mayer Brown, Missouri Regulates Providers and Brokers Under New Commercial Financing Law (September 2024), and Utah Enacts Commercial Financing Disclosure Law with a Registration Obligation (March 2022).

This article is for informational and educational purposes only and does not constitute financial, investment, accounting, tax, or legal advice. The concepts discussed are general in nature and should be reviewed with qualified professionals based on your specific circumstances. AB 2116’s implementing regulations had not been published as of October 1, 2026, and this summary reflects the enrolled bill text as of that date. Capital Source provides access to commercial financing solutions through its affiliates, syndicates, network of banks, lending partners, and private credit funds/groups. Availability, approval, funding amount, structure, and terms are subject to business review, underwriting, and lender approval.