California's commercial financing disclosure rules and the APR line

For years the merchant cash advance industry had one consistent answer to the question of what an advance costs: a factor rate. Buy $100,000, pay back $145,000. No rate, no term, no comparison to anything else on the market.

California ended that for a defined slice of transactions, though it took four years longer than anyone expected.

The law, and the gap between passing and working

Senate Bill 1235, authored by Senator Glazer, was signed on September 30, 2018. It sits in Division 9.5 of the California Financial Code, sections 22800 through 22805.

The statute did not operate on its own. It directed the Department of Financial Protection and Innovation to write regulations first, and nothing was required of any funder until those rules existed. California's Office of Administrative Law approved them on June 9, 2022, and they took effect on December 9, 2022.

That timeline is practical information, not trivia. If your advance funded in 2021, there is no California disclosure to look for, and its absence is not a violation.

Who owes you a disclosure

The rules reach providers of commercial financing, defined broadly enough to cover closed end loans, open end credit plans, factoring, asset based lending, lease financing, and sales-based financing. A merchant cash advance is sales-based financing, and it is covered by name.

Two boundaries decide whether your deal is in scope:

• Size. The transaction has to be $500,000 or less.
• Location. The recipient business has to be directed or managed principally from California. Where the funder is located does not control.

Three exemptions matter to a business owner reading its own file. Depository institutions are exempt, which is why a bank line of credit arrives with no SB 1235 disclosure. Financing secured by real property is exempt. And so is anyone who makes no more than one commercial financing transaction in California in a twelve month period, or five or fewer that are incidental to their actual business.

That last one is narrow on purpose. It covers the occasional deal from someone not in the finance business. It does not cover a funder placing advances all year.

What the disclosure has to say

At the time a specific offer of financing is made, the provider has to hand over a standardized disclosure containing:

• The total amount of funds provided, and the amount actually disbursed to you after any amounts withheld
• The total dollar cost of the financing
• The term, or for a product without a fixed term, the estimated term
• The method, frequency, and amount of payments
• Any prepayment policies, including whether early payoff reduces the cost
• The total cost of the financing expressed as an annualized rate
• For products without monthly payments, an average monthly cost figure

The regulations also govern format. This is meant to be a standalone, readable page, not a sentence buried on page nine, and the provider must give it before you commit.

How that annualized rate is actually built

The rate is not the funder's own arithmetic. Section 940 of Title 10 of the California Code of Regulations requires it to be computed under either the United States Rule method or the actuarial method set out in Appendix J to 12 CFR Part 1026, the same appendix federal Regulation Z uses for consumer credit.

Section 942 handles the genuinely hard part, a product with no fixed term. The provider has to build the estimate from a projection of your monthly sales, and account for the specified payment amounts, any change in the split rate over the life of the deal, a contractual minimum payment, payments triggered when your remittances fall under a contracted threshold, and any true-ups the agreement anticipates.

Section 955 sets the tolerance. A disclosed rate counts as accurate if it is no more than one eighth of one percentage point below the figure computed under section 940. In an irregular transaction the allowance widens to one quarter of a point, and irregular means multiple advances, uneven payment periods, or uneven payment amounts.

That is a tight band. If your own math puts the deal tens of points above what the page says, the difference is not rounding. Write down both numbers and keep them together.

What an annualized rate does to a factor rate

Take a hypothetical. Sierra Grove Cafe is offered $100,000 at a 1.45 factor, repaid at $1,208 per business day, which retires $145,000 in roughly 120 business days, call it six months.

Stated as a factor rate, that is "45 percent." It sounds like an annual number and it is not. You do not have $100,000 for six months. You have the full amount on day one and a shrinking fraction of it every day after, while paying the entire $45,000 of cost across that same shrinking balance.

Annualize it properly and an advance in that shape discloses at a rate in the triple digits. That single line is the whole point of the California rule. Nothing about the deal changed. The label did.

The comparison this enables is the useful part. An SBA loan, an equipment lease, and a merchant cash advance can finally be laid side by side on one axis instead of three different vocabularies.

What California deliberately did not do

Be clear about the limits, because a disclosure regime is often mistaken for protection:

• It sets no maximum rate. A properly disclosed 180 percent is lawful.
• It does not convert an advance into a loan, and it does not resolve the separate legal question of whether a given advance is a disguised loan for usury purposes.
• It does not license or bond the funder.
• It does not create rights over a contract signed before December 9, 2022.
• It does not police the broker layer the way Florida's statute does.

Enforcement runs through the Department of Financial Protection and Innovation. This is a supervisory scheme rather than a route for an individual business to unwind a bad deal.

The rules were challenged, and they held

The industry did not accept this quietly. In Small Business Finance Association v. Hewlett, a trade group argued the disclosure regulations compelled speech in violation of the First Amendment and were preempted by the federal Truth in Lending Act.

The Central District of California granted summary judgment for the Department on December 4, 2023. The Ninth Circuit affirmed on April 15, 2025, finding the required disclosures purely factual and uncontroversial.

The takeaway for a business owner is short. The disclosure page is settled law, not a rule waiting to be struck down. A funder that skipped it on a covered deal has no live legal argument for having done so.

If you never got a disclosure

First check the two boundaries. Funded after December 9, 2022, transaction $500,000 or less, business directed or managed from California. If any one of those is missing, there was nothing to give you.

If all three fit and no disclosure exists, keep the record. Note the funding date, the amount, the broker who placed it, and what you were told the cost was. Complaints filed with the DFPI are how the department sees a pattern, and your file is stronger when the contract, the bank statement, and your own contemporaneous notes agree with each other.

Using the disclosure when you are behind

If you have a disclosure page, it hands you two numbers that are hard to argue with in a negotiation: the total dollar cost and the amount actually disbursed. Those figures come from the funder's own paperwork, which makes them a better starting point than anything you reconstruct yourself.

Line them up against what has actually been debited to date. On many stacked files, a business discovers it has already paid back more than it received across the whole stack, with a balance still running. That is a fact worth knowing before any conversation about restructuring or negotiating balances.

A reasonable next step

Pull every agreement funded after December 2022 and check whether a disclosure page came with it. Put the annualized rate from each one on a single sheet next to the daily debit. Seeing all of them in one column is usually the moment the size of the problem becomes concrete rather than vague.