California's commercial financing disclosure rules: SB 1235 and what the DFPI made of it

California requires an annual percentage rate on the offer sheet, including on a merchant cash advance. That single decision is what makes the California regime worth understanding even if you fund somewhere else — several later state laws copied the structure and left the APR out.

The statute and the four-year gap

SB 1235 (2018) added Division 9.5 to the California Financial Code. It set out the disclosure duty and then handed the detail to the regulator: the Commissioner had to adopt regulations before the requirements took effect. The Department of Financial Protection and Innovation finished that job in 2022. The Office of Administrative Law approved the rules on 9 June 2022 and they took effect on 9 December 2022.

The DFPI describes the rules as reaching a broad set of providers, including traditional installment loans and open-end credit, commercial factoring, and merchant cash advances. Its summary of the required content is short: the funding amount the business receives, the annual percentage rate, the payment amount where there is one, the term, the prepayment policy, and an average monthly cost figure for products without monthly payments. The disclosure is given when the provider extends the offer, and you sign it before the provider finalises the transaction. The DFPI's own page on commercial financing disclosures is the place to check the current version.

Who is covered and who is not

Division 9.5 works off two definitions worth knowing. A provider is a person who extends a specific offer of commercial financing. A recipient is a business receiving an offer of $500,000 or less — which is the real ceiling on the whole regime. Above that, no disclosure.

The exemptions in Financial Code section 22801 run to depository institutions; lenders regulated under the federal Farm Credit Act; transactions secured by real property; certain motor vehicle dealer and rental company financing at $50,000 and above; and providers doing no more than one commercial financing transaction in California in a twelve-month period, or five or fewer that are incidental to their business.

Commercial loans under $5,000 sit outside the definition of commercial financing. Small equipment and micro-advance deals can therefore fall through the gap.

Why the APR line matters more here

Most of the state disclosure laws passed after California ask for a total dollar cost and stop there. Total dollar cost is useful and it is not the same thing as price. Two offers can carry identical dollar costs and be wildly different transactions if one is repaid over four months and the other over sixteen.

An APR forces the time dimension into the number. On a sales-based product the term is an estimate, so the APR is an estimate too — but it is an estimate you can compare against a term loan quote, which a factor rate never is. If a salesperson tells you the APR on your California sheet is "not really the cost", ask them what number they would compare to a bank line of credit.

Reading the sheet you receive

• Funding amount. What lands in the account, not the face amount of the deal. If the two differ, the difference is a fee you are financing.
• Annual percentage rate. Compare it against every other offer's APR and against any bank or SBA quote you hold. It is the only figure on the page built for comparison.
• Estimated term. On revenue-share products this is driven by an assumption about your sales. Ask what sales figure was used.
• Average monthly cost. Provided where there are no monthly payments. Useful for cash-flow planning, useless for comparing price. Do not let it stand in for the APR.
• Prepayment. Whether paying early saves you anything. On most advances it does not, and that changes what a short term is worth.

The estimated term is doing the work

On a sales-based product the APR on your sheet rests on an assumed repayment duration, and that assumption is the most movable figure in the disclosure.

Identical dollars, identical factor, and a disclosed rate that moves by nearly eighty percentage points. That is not a defect in the APR. It is the thing the APR tells you and the factor rate cannot. Ask which sales figure produced the estimate, and ask what the rate becomes if your sales come in twenty percent under it.

The edge at $500,000

The regime reaches a recipient receiving an offer of $500,000 or less. A business that takes $520,000 as a single facility receives no disclosure; the same business taking $480,000 does. If you are near that line and you want the sheet, the size of the request is the part you control.

What California does not do here

The disclosure law does not cap what you can be charged. It does not decide whether a particular advance is a loan or a purchase of receivables. It does not stop a funder taking a daily or weekly debit out of your account. What it does is make the price legible before you sign.

Separately from the disclosure rules, the California Financing Law requires a licence to engage in the business of a finance lender or finance broker in California, and the definition of finance lender expressly includes making commercial loans. That is a different question from disclosure, and it is worth asking about separately.

Check before you rely on it

The dollar thresholds, the exemption list and the format requirements have all been revised at least once since 2018 and can move again. Read the current text on the DFPI site before you build a decision on a number quoted in an article, this one included. The CFPB determined in March 2023 that state commercial financing disclosure laws in California, New York, Utah and Virginia are not preempted by the federal Truth in Lending Act, so the state layer is the operative one for business credit.

This is general information and not legal advice for your situation.