California Commercial Financing Disclosure Rules: What Small Business Owners Need to Know
In short: Since 2023, California law requires most business financing offers under $500,000 to include a disclosure form showing the total cost you'll repay (including fees) and a simple annualized rate so you can compare offers. This applies to merchant cash advances, term loans, lines of credit, invoice factoring, and similar products. The annualized rate is not an actual APR, but it helps you see the true cost of different funding options.
Key takeaways
- California SB 123 requires a standardized disclosure for business financing under $500,000, covering Total Cost of Capital and an annualized rate.
- The rule applies to merchant cash advances, term loans, lines of credit, invoice factoring, and other commercial financing products.
- The disclosed annualized rate is not an APR; it's a simple rate that helps you compare offers with different structures.
- Always ask for the disclosure before signing; by law, it must be provided to you.
What Are California's Commercial Financing Disclosure Rules?
If you're a small-business owner in California considering financing, you need to know about the state's Commercial Financing Disclosure Law (Senate Bill 123). This law, effective since January 2023, requires lenders and brokers to provide a clear, standardized disclosure form to businesses for commercial financing under $500,000. The goal is to make costs transparent so you can compare offers without hidden fees or confusing terms.
The disclosure includes two key numbers: the Total Cost of Capital (the total amount you'll repay) and a simple annualized rate. This applies to many types of funding, including merchant cash advances, term loans, business lines of credit, invoice financing, and equipment financing. The law covers both direct lenders and intermediaries like brokers. Because our service is a free matching platform that connects you with vetted funding partners, we support transparency and recommend you always review the required disclosures before accepting any offer.
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Which Types of Financing Are Covered?
The disclosure rules apply broadly to commercial financing products offered to businesses in California, regardless of the lender's location. Here's what's included:
- Merchant cash advances (including those using a factor rate)
- Term loans (fixed or variable rate)
- Business lines of credit (draw-based)
- Invoice factoring and invoice financing
- Equipment financing (leases and loans)
There are a few exceptions: transactions secured by real property (like a commercial mortgage) are not covered. Also, financing to larger businesses (financing over $500,000) or to businesses that are publicly traded may be excluded. The law does not apply to consumer loans. If you're offered any type of business funding under the threshold, you're entitled to the disclosure.
What About Personal Guarantees and Collateral?
While the disclosure does not require listing your personal guarantee terms, the law is separate from other federal regulations. Your offer documents will still include details about any personal guarantee or collateral required. The financing disclosure focuses on costs and repayment structure.
What Must Be Disclosed: Key Terms
The California disclosure form must contain several specific items. Here's what to look for:
- Total Cost of Capital: The total dollar amount you will repay, including principal, fees, and any finance charges. This is not the same as the funded amount.
- Simple Annualized Rate: A percentage that expresses the cost of the financing as a simple annual rate. It uses the total cost and the expected repayment period, but it is not an APR, does not account for compounding, and is not the same as your actual interest rate.
- Repayment Terms: The payment amount, frequency (daily, weekly, monthly), and the term length.
- Prepayment Penalties or Discounts: If you can prepay, whether there's a penalty or discount for doing so.
- Fees That Are Not Included: The disclosure may note that certain fees (like late fees or origination fees) are not included in the annualized rate.
Understanding Factor Rates vs. APR
Many merchant cash advances use a factor rate (e.g., 1.20). That means for every dollar advanced, you repay $1.20. The California disclosure takes the total repayment amount and calculates a simple annualized rate based on the repayment timeline. For example, a $25,000 advance with a 1.20 factor rate means you repay $30,000. If you repay in 6 months, the annualized rate might be around 40% (illustrative example only). This rate is not an APR; it's a tool to compare offers with different structures.
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How to Read the Disclosure: An Illustrative Example
Let's consider a hypothetical offer. You're a small business in Los Angeles and you're offered a $20,000 merchant cash advance with a factor rate of 1.25, repaid through daily ACH withdrawals over 8 months. The disclosure would show:
- Total Cost of Capital: $25,000 (20,000 × 1.25)
- Simple Annualized Rate: Approximately 46% (illustrative example only)
- Payment Amount: $104.17 per day (assuming 240 business days)
- Term: 8 months
That $25,000 total cost includes the original $20,000 plus $5,000 in finance charges. Compare that to a term loan with a 10% interest rate and a 12-month term: the disclosure might show a Total Cost of Capital closer to $21,100 and an annualized rate near 10%. The disclosure helps you see that the factor-based product is more expensive in total dollars despite the quick access.
Remember: these are illustrative examples. Your actual rates and terms will vary by the funding partner and your business profile. Our free matching service can help you see offers from multiple vetted sources, each providing the required California disclosure.
Practical Tips for Small Business Owners
Always Request the Disclosure Early
By law, the disclosure must be given to you before you sign the closing documents. But you can (and should) ask for it during the application process to compare offers. Reputable funding partners will provide it upon request. If a potential funding source hesitates or says they don't have one, that's a red flag.
Compare Offers Using the Annualized Rate
Because each product may have different structures (e.g., factor rate vs. interest rate, daily vs. monthly payments), the simple annualized rate gives you a common yardstick. However, be aware that this rate is not the same as the cost of a credit card or loan APR. Use it strictly for comparing similar types of financing.
Watch for Fees Outside the Disclosure
The disclosure may not include late payment fees, origination fees, or other charges that could affect the total cost. Read the full offer documentation carefully. If a fee is listed as excluded, add it to your analysis.
Check Prepayment Terms
Some products charge a penalty if you pay off early, while others offer a discount. The disclosure will indicate prepayment treatment. Early payoff can affect the annualized rate calculation.
Common Mistakes to Avoid
- Assuming the annualized rate is an APR: It's not. APRs include compounding and are calculated differently. Don't compare the annualized rate to a credit card APR directly.
- Focusing only on the payment amount: A low daily payment might hide a high total cost. Always look at the Total Cost of Capital.
- Ignoring the repayment frequency: Daily or weekly payments can impact cash flow. Make sure the payment schedule works with your business's revenue patterns.
- Not shopping around: California's disclosure law makes it easier to compare offers side by side. Take advantage of that. Our free service can match you with multiple vetted funding partners so you can compare.
- Signing without reading the full contract: The disclosure is a summary. The actual contract includes additional terms like defaults, renewals, and personal guarantees. Read everything.
How Our Free Matching Service Helps
We are not a lender or broker of record. Instead, we provide a free service that connects small-business owners with vetted, third-party funding partners. When you use our platform, you may receive offers from partners who are familiar with California's disclosure rules. We encourage you to review the required disclosures for each offer and ask questions before accepting. Our goal is to help you find financing with transparency, so you can make an informed decision for your business.
Conclusion: Knowledge Is Your Best Tool
California's Commercial Financing Disclosure Law puts important information in your hands. By understanding what the disclosure tells you (and what it doesn't), you can better evaluate the true cost of financing. Use the Total Cost of Capital and the simple annualized rate as starting points, but always dig deeper into the terms. And when you're ready to explore funding options, our free matching service is here to help you connect with partners who prioritize compliance and clarity.