Some commercial lenders charge California small businesses effective interest rates above 100 percent on products dressed up as “quick funding solutions.” Assembly Bill 2116, the Protect Small Business from Predatory Lending Act, has now passed the California Legislature and is headed to the governor’s desk.
Similar legislation has been introduced at least three times in recent years, but previous efforts stalled before receiving final legislative approval. This time, the bill cleared both chambers and the governor has until September 30 to sign or veto.
What the bill actually does
AB 2116 expands the scope of the California Financing Law to cover specified commercial financing transactions offered to small businesses and establishes requirements and prohibitions on commercial financing providers and brokers. That includes merchant cash advances, factoring, asset-based lending, and certain lease financing.
Starting January 1, 2028, the bill would prohibit a person from engaging in the business of offering or providing commercial financing products without first registering with the commissioner. The Department of Financial Protection and Innovation (DFPI) will write the registration and conduct rules. The DFPI estimates $1.57 million in first-year costs to implement the new licensing regime.
The bill also bans confessions of judgment and powers of attorney before a default, outlaws gag clauses that stop borrowers from discussing loan terms, and treats misleading statements by lenders as unfair or deceptive acts under California consumer financial protection law.
It covers transactions of $500,000 or less to for-profit businesses with annual gross receipts up to $16 million, a threshold that will adjust for inflation every two years.
Why small businesses should pay attention now
The bill’s supporters point to a surge in high-cost commercial financing marketed to business owners dealing with tariff uncertainty. Carolina Martinez, CEO of CAMEO Network, said the financing “is predominantly predatory and routinely offers effective interest rates of more than 100 percent.”
Assemblywoman Pilar Schiavo said, “Small business owners deserve the same basic expectation that when they seek financing to keep their doors open, grow their business, or make payroll, they will not be trapped by predatory practices.”
Not everyone supports the bill. The Fintech and Transactions Association warned the bill would subject nonbank platforms that partner with regulated banks to duplicative supervision, even when the bank retains responsibility for underwriting.
Even if Governor Newsom signs AB 2116 before the September 30 deadline, the core registration and oversight obligations do not kick in until January 1, 2028. That gives lenders time to adjust, but it also means small businesses borrowing today still operate under the existing, thinner set of protections. Business owners considering merchant cash advances or other non-loan financing should review any agreements for provisions the bill would eventually ban, and prioritize lenders that already disclose full APR details.
The full bill text is on the California Legislature’s site. The next step is the governor’s signature or veto, and Assemblymember Schiavo’s office is urging Newsom to sign before the deadline runs out.
