California Commercial Financing Disclosure (SB 1235): What Small Businesses Need to Know

California's SB 1235 requires covered financing providers, and many of the brokers who arrange their deals, to hand a business owner a standardized written cost-and-term disclosure before the contract is signed. That disclosure generally states seven things: the funds you receive, the amount financed, the finance charge in dollars, an annualized rate expressed as an APR, the total you will repay, the payment size and frequency, and the prepayment terms. Its purpose is to let you compare a merchant cash advance against a term loan on one scale, instead of squinting at a factor rate on one offer and a weekly payment on another.

The single most consequential field is the APR, because it exposes the annualized cost of short, fast-repaid products where a factor rate alone hides it. SB 1235 caps nothing and bans nothing — a fully compliant offer can still be expensive. The exact disclosure fields, formats, calculation methods, and dollar thresholds were set by implementing regulations that took effect after the statute and can be amended, so treat every specific below as a general description to confirm against the current California rules before you rely on it.

Why California passed a disclosure law

Before SB 1235, small-business financing sat in a disclosure gap. Consumer mortgages and credit cards had carried standardized APR and total-cost boxes for decades under federal law, but a business owner shopping for working capital received offers written in incompatible units: a 1.42 factor rate from one funder, a $780 daily payment from a second, a 3-point origination fee plus a monthly rate from a third. Putting them on the same axis was nearly impossible, and short-term advances routinely carried effective annualized costs the borrower never clearly saw.

SB 1235 closes that gap for commercial, business-purpose financing by requiring covered providers to present a defined-format disclosure at the time an offer is extended, before signing. The goal is comparability and transparency, not price control. Consumer loans stay under their own separate regimes. One point worth internalizing: the statute set the skeleton, but the operative details — which fields appear, how APR is calculated, and the dollar cutoffs for coverage — live in regulations that were finalized later and can change, so a detail that is accurate today may be amended tomorrow.

Who has to give the disclosure, and who is generally exempt

The obligation falls on the provider extending a commercial financing offer, and in many cases on the broker who solicits or arranges it. Covered structures commonly include term loans, open-end lines of credit, factoring, and merchant cash advances. Several categories sit outside the core scope, and the split matters because it determines whether you are entitled to a disclosure at all.

Illustrative only; confirm actual coverage and thresholds under current California law. Exemptions also exist at the small end and for certain lenders licensed under other regulatory regimes. If an offer arrives with no disclosure, that is a signal to check whether the provider is exempt or simply out of compliance — and to ask directly which one it is.

The seven fields, and why APR is the one that bites

The disclosure is built around a fixed set of cost and term fields. Labels and formatting are set by regulation, but the substance is generally this:

• Total funds provided — the money that actually reaches your account.
• Amount financed — funds provided, adjusted for amounts paid to third parties or withheld at funding.
• Finance charge — the full dollar cost of the financing.
• Annual percentage rate (APR) — the cost annualized, so different products land on one scale.
• Total repayment amount — every dollar you will pay over the life of the deal.
• Payment schedule — payment size and frequency (for example, daily, weekly, or monthly), or the method used when payments vary with sales.
• Prepayment terms — whether paying early cuts the cost, and any prepayment charge.

APR is the field that changes the game for merchant cash advances. A factor rate of, for example, 1.40 tells you that $50,000 becomes $70,000 to repay, but it says nothing about speed — and speed is what drives annualized cost. Repay that same $70,000 over roughly 6 months and the APR lands far higher than repaying it over 18 months, even though the factor rate is identical. Annualizing the cost forces a short, fast-repaid advance to reveal an expense the factor rate quietly conceals.

Reading a disclosure and comparing two offers

With disclosures from two or more providers in hand, line the identical fields up against each other. Never compare a factor rate to an interest rate, or a daily payment to a monthly one — that mismatch is precisely what the law exists to remove. The two numbers that summarize an offer fastest are the APR (the annualized price of the money) and the total repayment amount (the total dollars leaving your business).

Illustrative figures only. Offer A costs more in total and repays faster, which drives its APR up sharply — the signature pattern of short daily-payment advances. Offer B costs fewer total dollars spread over a longer term, so its APR is lower. Then read the prepayment line: on many advance-style products the cost is largely fixed, so paying early does not proportionally shrink it, and a low headline factor rate can be misleading. A high APR is not automatically the wrong choice — speed and certainty have value — but the disclosure ensures you are choosing it with the true price in front of you.

What the disclosure will not do for you

SB 1235 is a transparency measure with firm limits. It sets no cap on interest rates or factor rates, bans no category of financing, and guarantees neither approval nor any particular price. A product can be entirely compliant and still carry a steep cost; the disclosure's job is to make that cost visible before you sign, not to lower it.

It also does not replace the contract. The disclosure summarizes headline terms, but the financing agreement governs your actual obligations — default provisions, personal guarantees, UCC filings, and how sales-based payments are recalculated. Read both documents. If the disclosure and the contract appear to conflict, ask the provider to reconcile them in writing before you proceed, and route any large or complex deal past an attorney or accountant first.

How disclosure intersects with MCA relief and restructuring

Many California businesses stack two or three daily- or weekly-payment merchant cash advances and then hit a cash-flow wall when the combined debits swamp deposits. In that situation the common route is MCA relief, sometimes called reverse consolidation, which restructures the funding so the daily or weekly payment amount is lowered to ease cash flow. It changes the payment burden only — it does not pay off, settle, or buy out the existing advances, which stay in place.

Any new financing inside a relief arrangement is itself commercial financing, so if the provider is covered it should arrive with its own SB 1235 disclosure. Use that disclosure exactly as you would any other: read the new payment schedule, the total repayment amount, and the APR, then weigh near-term relief against long-term cost. A lower payment stretched over a longer horizon can still raise the total dollars paid, and the disclosure is what lets you see that trade before you commit.

As a general sense of how these products are structured in this market, offers often start at a $10,000 minimum, may consider applicants with a FICO of 500 or higher, and can return an approval decision in roughly 24 to 48 hours. Those are typical parameters, not promises — pricing, approval, and terms depend on the business, and no outcome is guaranteed.