California SB 1235 became effective December 9, 2022, after years of delayed enforcement. It requires standardized disclosure on commercial financing under $500,000 offered to California businesses, including merchant cash advances. It was the first state-level commercial financing disclosure law of its kind, and it set the template that NY, VA, UT, CT, and others followed. Here's what it actually requires.
What SB 1235 requires
Funders must provide standardized disclosure on every covered offer:
- Total amount of financing
- Disbursement amount (after origination fees)
- Term length
- Total cost of financing (everything paid back over the term)
- Annual percentage rate (APR) calculated using DFPI-specified methodology
- Average monthly cost
- Prepayment policy — fees, discounts, or restrictions if the merchant pays early
For MCAs specifically, the regulation has a "sales-based financing" subcategory with rules tailored to the receivables-contingent payment structure.
Who's covered
- Commercial financing under $500K to California-based businesses
- MCAs, term loans, lines of credit, factoring, lease financing
- Banks and credit unions exempt
- Most secured commercial real estate exempt
- Anyone funding more than 5 commercial financing transactions per year in CA falls under the regime
How CA's APR calculation differs from NY's
Both states require APR-equivalent disclosure but use different methods. CA's DFPI-prescribed calculation method tends to produce slightly different numbers than NY's, especially for percentage-of-card-sales structures where the daily payment varies. The underlying cost of the advance hasn't changed — the disclosed APR-equivalent is just an estimate that depends on assumptions about repayment timing.
Funders writing in both NY and CA produce two different disclosure forms with two slightly different APR numbers. This is regulatory friction the industry has lobbied to standardize, but for now each state's form is what applies in that state.
What CA SB 1235 doesn't do
- Doesn't cap factor rates. Funders can still write at any factor the market supports.
- Doesn't ban stacking. Multiple advances are still legal in CA.
- Doesn't reclassify MCAs as loans. The product retains its sale-of-receivables structure.
- Doesn't subject MCAs to consumer-protection lending rules. CA DFPI handles this through commercial-financing rules, not consumer-lending rules.
DFPI registration requirement
Beyond the disclosure rules, SB 1235 also requires commercial financing providers to be licensed or registered with the California Department of Financial Protection and Innovation (DFPI). This isn't a new license type — it's a registration that the funder is operating in CA and subject to DFPI oversight. Merchants can verify licensing on the DFPI website before accepting an offer.
Why this matters to a CA merchant
The disclosure form is your real read on cost. Before SB 1235, CA merchants got a factor rate (1.32 over 8 months) without much help understanding what that meant in annualized terms. The disclosure form gives you APR-equivalent numbers alongside total cost so you can compare offers — both against each other and against bank capital you might also be considering.
If a funder doesn't give you a SB 1235 disclosure form on a CA-eligible deal, that's either non-compliance (red flag) or the deal is structured to fall outside the $500K coverage threshold. Either way, ask before signing.
Sources & References
- Bank denial and small business credit access figures cited in this piece are derived from the Federal Reserve Small Business Credit Survey. Approval rates for small business credit applications at large banks have ranged from approximately 13%-31% across recent survey years, depending on bank category and reporting period.
- Small business finance landscape and lending program data: SBA Office of Advocacy.
- Merchant cash advance industry standards and disclosure practices: Small Business Finance Association (SBFA).
- Commercial financing disclosure regulations referenced (NY FAIR Act, CA SB 1235/666/362, VA, UT) are summarized from the published statutes; consult counsel for specific compliance application.