California AB 2116 Clears Legislature, Setting Up Licensing for Commercial Finance Providers and Brokers
- F.I. Editorial Team
- 9 hours ago
- 6 min read
For years, regulation of small-business financing has been moving across the country one state at a time.
First came disclosure requirements. Then registrations. Then restrictions on certain contract provisions and collection practices.
Now California is preparing to take another significant step.
AB 2116 has cleared the California Legislature without a single recorded "no" vote and is headed toward the governor's desk. The Assembly gave final concurrence to the bill on August 20 by a 76-0 vote after the Senate passed it 37-0 the previous day.
If signed, the legislation would eventually require many commercial financing providers and brokers doing business in California to obtain a license from the California Department of Financial Protection and Innovation.
The legislation reaches a broad part of the commercial finance market, including:
accounts receivable purchases and factoring
asset-based financing
commercial loans
business lines of credit
lease financing
The new regulatory framework is scheduled to begin January 1, 2028, with the prohibition on operating without a license taking effect July 1, 2028.
For an industry that has spent much of the past decade adjusting to an expanding patchwork of state laws, California's latest move feels less like an isolated event and more like the next chapter of a story that has been building for years.
California Was Already Part of the First Wave
California actually helped start the modern movement toward commercial financing regulation.
In 2018, the state enacted SB 1235, which ultimately resulted in detailed disclosures for certain commercial financing offers below $500,000. The regulations took effect in 2022 and applied not only to traditional commercial loans but also to sales-based financing, factoring, open-end financing, leases, and asset-based transactions.
California was hardly alone for long.
New York developed its own commercial financing disclosure regime. Utah and Virginia adopted registration requirements. Connecticut, Florida and Georgia followed with commercial financing disclosure laws of their own. Kansas joined the list as well.
The details differ considerably from state to state, which is increasingly part of the problem for companies operating nationally.
Then the regulations started getting tougher.
Texas enacted HB 700 in 2025, creating disclosure requirements and requiring providers and brokers of commercial sales-based financing to register with the state. The law also prohibits confessions of judgment and imposes other restrictions specifically targeting sales-based financing transactions.
And earlier this year, Vermont went further. Its new law pulls sales-based financing and factoring into a licensing framework beginning in 2027.
That progression matters.
What began largely as a movement requiring commercial financing companies to tell businesses more about what they were signing has increasingly become a movement determining who is allowed to offer the financing in the first place.
AB 2116 pushes California further in that direction.
From Disclosures to a License
California already regulates commercial finance.
AB 2116 effectively raises the stakes by bringing covered commercial financing providers and brokers into the California Financing Law licensing system.
Under the bill, applicants that are not already appropriately licensed would undergo criminal background checks and fingerprinting. They would need to maintain at least $25,000 in net worth and meet bonding and other licensing requirements. The statutory application and investigation fees themselves total $300, plus fingerprint and criminal-history processing costs.
Those numbers by themselves are unlikely to scare away a serious national financing company.
The bigger issue is everything surrounding them.
A license means an ongoing regulatory relationship. It means examinations, reporting, recordkeeping, compliance infrastructure, and potential enforcement exposure. For a large fintech or established funder, that may simply become another cost of doing business. For smaller providers and independent broker shops, the calculation may be different.
And when every state develops its own version of these rules, the burden compounds.
An Industry Divided
One of the more interesting parts of the AB 2116 story is the contrast between what happened inside the Capitol and outside of it.
Inside the Legislature, there was effectively no fight at all in this latest version of this bill.
The bill passed its committee stops without opposition from lawmakers and ultimately sailed through both chambers without a 'Nay' vote.
Outside the Legislature, however, some major financial technology and alternative finance trade groups were considerably less enthusiastic.
The Financial Technology Association publicly opposed AB 2116, arguing that California is layering new requirements on top of an already heavily regulated commercial financing market. The organization warned that duplicative compliance obligations could increase costs, reduce financing options and discourage innovation.
The Innovative Lending Platform Association was also recorded in opposition to the bill.
The Revenue Based Finance Coalition, meanwhile, worked with lawmakers on the legislation but continued to raise concerns as it moved through the Capitol.
That does not mean the commercial finance industry lined up uniformly against AB 2116.
Rapid Finance and Kapitus, two established nonbank commercial financing companies, actually moved from a "support if amended" position to full support after changes were made to the bill. Small-business advocacy and consumer organizations have also backed the legislation.
So this isn't quite the simple story of government regulators on one side and the financing industry on the other.
The divide is more complicated.
Why California Says It Is Necessary
Supporters of AB 2116 make a fairly straightforward argument.
A business owner looking for $100,000 does not necessarily care whether the money they receive is legally classified as a loan, a receivables purchase, sales-based financing or some other structure.
From the business owner's perspective, they needed capital and a company provided it. Yet historically, the legal structure of the transaction could determine whether the company providing that money needed a lending license. Supporters believe that has created an uneven playing field.
Traditional nonbank commercial lenders operating under the California Financing Law already face licensing and supervision, while companies offering certain economically similar financing products have historically operated under different regulatory standards.
AB 2116 attempts to narrow that gap. It also prohibits taking a confession of judgment or power of attorney before default and gives California regulators additional authority over how financing costs and rates are communicated.
There is an understandable policy argument behind those protections.
The lower end of the alternative finance market has produced its share of problems: businesses taking financing they cannot realistically afford, aggressive stacking, questionable sales practices, and financing agreements that merchants sometimes sign without fully understanding the consequences.
Regulators were never likely to ignore that forever. But regulation does not occur in a vacuum.
The Bigger Question Is What Happens When Every State Has Its Own Rules
California's AB 2116 might ultimately be more important for what it represents than for any individual provision in the bill.
Commercial financing is becoming a state-regulated business in ways that would have seemed unlikely a decade ago.
California has one system.
New York has another.
Utah and Virginia created registration regimes. Connecticut has its own disclosure requirements. Florida and Georgia have theirs. Texas created a registration and regulatory framework specifically around sales-based financing. Vermont is moving certain commercial financing products into a licensing structure.
For a provider operating only in one state, that may be manageable.
For a fintech platform, lender, factor, MCA provider or brokerage operating in 20, 30 or 50 states, it becomes something entirely different.
Instead of building one compliance operation for commercial financing, companies increasingly have to build a matrix: what can be offered in each state, what must be disclosed, whether a company must register, whether it needs a license, how contracts must be worded, which collection tools are prohibited, and what information must be reported to regulators.
The industry can comply with those rules. The bigger question is what the cumulative cost does to the market.
Larger companies may absorb it. Smaller companies may consolidate, exit certain states, or decide that some markets simply are not worth serving.
That could be precisely what supporters of stronger regulation want when it eliminates bad actors.
It could also unintentionally eliminate legitimate providers willing to finance businesses that banks will not.
Both outcomes can occur at the same time.
California Will Be Closely Watched
AB 2116 still needs the governor's signature before it becomes law.
And even if it is signed, the industry has time. The major provisions do not begin taking effect until 2028. But commercial financing companies probably should not view that distant date as a reason to ignore what just happened.
California is one of the largest small-business markets in the country. Laws adopted there tend to attract attention well beyond the state's borders.
The regulatory debate has already moved beyond whether these products should have disclosures.
Increasingly, the question is whether the companies providing and arranging them should be licensed at all.
With AB 2116, California has given its answer.
If the governor signs it, the next question will be how many other states decide to follow.
This article is for news and informational purposes only and is not intended as legal advice. Commercial financing providers and brokers should consult qualified counsel regarding their obligations under California law and other state commercial financing laws.
