SFNet’s Advocacy Efforts Lead to Important Revisions in New California Commercial Financing Legislation

The State of California is on the cusp of adopting the annex legislation that directly affects commercial financing providers who make loans and advances to small businesses located in California. This legislation has passed both the California State Assembly and State Senate and is on the Governor’s “desk” for signature or veto.

AB 2116, as this proposed legislation is known, is intended to regulate all commercial financing providers who extend commercial loan products, including specifically, accounts receivable purchase transactions, factoring, asset-based lending, commercial open-end credit plans and lease financing to small businesses in California.

The primary goal of this legislation is to protect California small businesses from predatory and abusive practices in the context of commercial financing transactions. In this regard, the legislation specifically provides that if a commercial financing transaction is found to be “ unconscionable” under the California Civil Code it is deemed a violation of the California Financing Law (“CFL”) and subjects the financing provider to penalties under the CFL. For clarity, the CFL is the legislation that currently licenses commercial lenders in California. Furthermore, the statute would specifically prohibit a commercial financing provider from, among other things, making materially false or misleading statements or misrepresentations to a borrower or recipient about the terms and conditions of the borrower’s loan, false advertising and knowingly misrepresenting, circumventing or concealing any material aspects of or information regarding a financing transaction. If this were not enough a violation of this legislation would be deemed an unfair, deceptive or abusive act or practice under the California Consumer Financial Protection Law. 

The  proposed legislation seeks to achieve this goal by extending licensing to all commercial financing providers, including merchant cash advance providers and factors who currently operate outside of the California licensing framework. The licensing referred to in the legislation would be identical to the current licensing of commercial financing providers under the CFL.

The legislation would take effect on January 1, 2028. As a result, those factors and other lenders who are currently unlicensed would have to be licensed to lend to small businesses as the penalty for not having such a license would be the inability on the part of the factor or other lender to enforce the transaction.

The legislation is limited to commercial financing transactions of $500,000. or less. A “small business” is defined as a business entity organized for a profit with annual gross receipts of no more than $16,000,000 or an annual gross receipts level as biennially adjusted by the Department of General Services in accordance with Section 14837 of the Government Code, whichever is greater.

Prior drafts of this legislation required that all commercial financing providers who lent to small businesses obtain a second license even if previously licensed under the CFL. SFNet, through its lobbying efforts, was able to defeat this proposed provision and the proposed legislation is now clear that a provider with an existing CFL commercial lending license does not have to be re-licensed.

In the prior iterations of the legislation, the drafters included a prohibition which provided that “a commercial financing provider or a commercial financing broker shall not include a provision in a commercial financing transaction agreement or contract  that authorizes a commercial financing provider or a commercial financing broker to attach or garnish any of recipient’s money held in an account in a depository institution”. This proposed provision brought into question the enforceability of deposit account control agreements,  sweep accounts and other forms of cash management which granted lenders pre-default rights in its borrower’s bank account as is currently permitted in accordance with Section 9-104 of the California version of the Uniform Commercial Code. Again, through the efforts of SFNet, this prohibition was eliminated from the legislation.

This summary of the proposed legislation is not intended to be a comprehensive review of all aspects of AB 2116 and the reader should consult counsel and the actual provisions of the legislation to fully understand the import of the legislation.