California’s Commercial Financing Disclosure Law
California Senate Bill 1235, effective December 9, 2022, requires providers of commercial financing, including merchant cash advances, to provide standardized disclosures to small business borrowers. This is the most comprehensive MCA disclosure requirement in the United States.
What Must Be Disclosed
Under SB 1235 and implementing regulations from the California Department of Financial Protection and Innovation, MCA providers must disclose the total funds provided, total dollar cost, term or estimated term, method and frequency of payments, total payments, prepayment policies, and the estimated annualized percentage rate. The APR disclosure is particularly significant because it translates factor rates into a metric directly comparable to traditional lending.
How This Helps California Businesses
Before SB 1235, businesses received offers quoting only the factor rate, which obscures true cost. A factor rate of 1.35 sounds like 35 percent. The required APR disclosure reveals the actual annualized cost may be 70, 100, or even 200 percent. This transparency allows informed comparisons between MCAs and traditional financing, exposes the real cost premium, and may discourage businesses from taking MCAs they cannot afford.
Enforcement and Penalties
The California DFPI has enforcement authority including fines and license revocation. Borrowers who did not receive required disclosures may have additional legal defenses, as failure to disclose supports arguments of unfair business practices under California’s Unfair Competition Law.
Limitations
SB 1235 applies only to California businesses. It does not cap rates or prohibit specific terms. It is a disclosure law, not substantive regulation. Funders can still charge high factor rates as long as they disclose the APR equivalent. The law does not apply to transactions over $500,000.
Using Disclosures in Your Defense
If you are a California business that received an MCA without required disclosures, talk to an attorney about how the absence affects enforceability and what additional remedies are available under California law.