California AB 2116 Brings Merchant Cash Advances Under State Licensing: What Business Owners Should Know

California AB 2116 is now law. Governor Gavin Newsom signed it on September 30, 2026, and it is the biggest change to how California regulates merchant cash advances since the state’s disclosure law took effect in 2022. Until now, MCA funders that didn’t make loans could operate in California without a state finance license. Starting in 2028, most will need one.

The law brings “commercial financing” of $500,000 or less to small businesses under the California Financing Law, administered by the Department of Financial Protection and Innovation (DFPI). According to Orrick and Morrison Foerster, that includes merchant cash advances, factoring and other receivables purchases, asset-based lending, commercial loans, open-end credit, and lease financing. Brokers are covered too.

Here is what changes, when, and what it does and doesn’t mean for a California business that already has MCA debt.

What AB 2116 Does

AB 2116 does three main things, according to the law-firm analyses published since it was signed.

1. Licensing for providers and brokers

Commercial financing providers and brokers must hold a California Financing Law license from the DFPI. Applicants face background checks and fingerprinting, a business plan, financial statements showing at least $25,000 in net worth, and a surety bond of at least $25,000. Licensees also take on annual reports, recordkeeping, and DFPI examinations.

2. New conduct rules

• No confessions of judgment or powers of attorney taken before a default.
• No confidentiality terms that stop a business from disclosing what it learned in the deal, including the product’s terms.
• Unconscionable deals become violations. A transaction found unconscionable under California Civil Code § 1670.5 is treated as a violation of the Financing Law.
• Unfair, deceptive, or abusive practices are prohibited for providers and brokers.
• Brokers must post the average and maximum APR of the deals they arranged in the prior year on their websites.
• Repeatedly ignoring a business’s ability to repay can cost a provider its license, according to Holland & Knight.

3. Unenforceability for unlicensed providers

Starting in 2028, a covered agreement is generally not enforceable unless the provider is licensed, has a complete license application pending, or entered into the deal before January 1, 2028. This is the part with real teeth, and it differs sharply from other states’ MCA laws (more on that below).

Who Is Covered, and Who Isn’t

Out-of-state funders shouldn’t assume they’re outside the law. Ballard Spahr notes that it doesn’t appear to have a general physical-presence exception, so providers serving businesses located in California should plan as if it applies.

The Timeline: 2028, With a Gap Lawyers Are Already Flagging

The analyses don’t all agree on how January and July 2028 fit together. Hinshaw and Morrison Foerster both point out that the enforceability rule starts in January, six months before licensing is required. Deals signed during the first half of 2028 by a provider without a license or pending application could be at risk. Ballard Spahr reads the application safe harbor as running to January 1, 2028. Expect either a legislative fix or DFPI guidance, and expect careful funders to apply early.

What It Means If You Already Have an MCA

For most California owners reading this today, the honest answer is: nothing changes yet.

• Existing agreements are carved out. The enforceability rule doesn’t reach deals entered before January 1, 2028. Don’t stop paying a current MCA because of AB 2116.
• It isn’t a rate cap. None of the analyses describe an interest-rate or factor-rate limit. The cost of a deal is still governed by California’s existing disclosure rules, including SB 1235 and the SB 362 APR rules in effect since January 2026.
• Confessions of judgment are already weak in California. Since January 1, 2023, judgments by confession have been unenforceable in California superior courts. AB 2116 goes further by barring funders from taking one before a default. If a funder used a confession of judgment from another state, see how to vacate a confession of judgment in San Diego and our confession of judgment guide.
• Today’s defenses still apply today. If you’re being sued now, the playbook is the one in our California MCA defense strategies and how to fight an MCA lawsuit in California guides.

For deals signed in 2028 and later, a funder’s license status becomes one of the first things an attorney should check.

How California’s Approach Differs From Other States

Several states regulate merchant cash advances, but most do it through disclosure and registration enforced only by regulators. In Texas, Florida, and Utah, a funder’s violation generally doesn’t make the deal unenforceable, and business owners can’t sue under those laws directly.

AB 2116 takes a different route. By putting MCA providers under the same licensing law as lenders and tying enforceability to licensure, it gives businesses a contract-level consequence for unlicensed activity starting in 2028. Combined with California’s existing disclosure and APR rules, that makes California the most heavily regulated state for small-business financing. Our merchant cash advance laws by state guide compares the approaches.

What Happens Next

1. DFPI implementation. Firms differ on whether the DFPI must issue rules first. Watch for guidance on APR calculations, application filing, and the 2028 timing gap.
2. A possible cleanup bill. Several firms suggest the Legislature may need to align the January and July 2028 dates.
3. Industry consolidation. Smaller brokers and funders that can’t meet the net-worth, bond, and background requirements may exit California before 2028.
4. Litigation over scope. Expect disputes over which products count as “commercial financing” and how the bank-partnership language applies.

CredibleLaw will update this post as the DFPI acts. For ongoing coverage, see our merchant cash advance news page.

Frequently Asked Questions

What is California AB 2116?

AB 2116 is a California law signed on September 30, 2026 that brings commercial financing of $500,000 or less to small businesses, including merchant cash advances and factoring, under the California Financing Law. Providers and brokers will need a license from the Department of Financial Protection and Innovation.

When does AB 2116 take effect?

Most provisions take effect January 1, 2028. The licensing requirement takes effect July 1, 2028, and a provider that has filed a complete license application by then can generally keep operating while it is pending.

Does AB 2116 cancel my existing merchant cash advance?

No. The enforceability rule does not reach agreements entered into before January 1, 2028, and the law does not cap rates. Existing MCAs remain governed by their terms and by California law already in effect.

What happens if an unlicensed funder gives a California business an MCA after 2028?

Under AB 2116, a covered commercial financing agreement generally is not enforceable unless the provider is licensed, has a complete license application pending, or entered into the transaction before January 1, 2028.

Does AB 2116 ban confessions of judgment?

It bars providers and brokers from taking a confession of judgment or power of attorney before a business defaults. Separately, California has made judgments by confession unenforceable in its superior courts since January 1, 2023.

Are banks covered by AB 2116?

Banks and other depository institutions are generally exempt. A non-bank that arranges bank financing through an online platform it runs may still count as a provider.

Does AB 2116 cap MCA factor rates?

No. None of the published analyses describe a rate cap. Brokers must post the average and maximum APR of their prior-year deals, and California’s existing disclosure and APR rules still apply.

Sources

• Orrick InfoBytes: California enacts licensing regime for small business commercial financing (Oct. 2, 2026)
• Morrison Foerster: California expands the California Financing Law to include small business commercial financing (Oct. 15, 2026)
• Holland & Knight: California enacts commercial financing licensing requirement (Oct. 20, 2026)
• Hinshaw & Culbertson: Expansive new commercial financing licensing requirement (Oct. 2, 2026)
• Ballard Spahr Consumer Finance Monitor: California enacts sweeping new regulation of commercial financing (Oct. 13, 2026)
• Snell & Wilmer: California’s departure from judgments by confession