The Greene Room: By Kenneth C. Greene, Esq.
California is once again considering legislation that would significantly expand the regulation of the commercial finance industry. But buried in Assembly Bill 2116 is a provision that may prove considerably more important than the licensing requirements themselves. It could make an otherwise valid commercial financing agreement unenforceable simply because the provider did not have the required license.
For an industry accustomed to treating licensing primarily as a regulatory compliance issue, this should get everyone’s attention.
The Bill
AB 2116 would increase the types of commercial financing transactions subject to the California Financing Law (“CFL”) and the jurisdiction of the Department of Financial Protection and Innovation (“DFPI”) compared to existing law.
The bill still generally applies to commercial financing offers of $500,000 or less made to qualifying small businesses. Its expanded definition of commercial financing is broad and includes commercial loans, factoring, accounts receivable purchases, sales-based financing, asset-based lending, open-end commercial credit and certain “lease financing.”
Equipment lessors should not panic—at least not yet.
The bill’s reference to “lease financing” incorporates the existing definition in Financial Code § 22800. That definition generally encompasses a lease containing a purchase option that creates a security interest under the California Commercial Code. It therefore does not appear to sweep ordinary true leases into the new licensing regime merely because they are equipment leases.
But that is probably not the most important part of AB 2116.
No License, No Enforcement
Proposed Financial Code § 22658 provides that a covered commercial financing agreement is NOT enforceable unless the provider is properly licensed, has timely submitted a complete license application that remains pending, or the transaction was entered into before January 1, 2028.
California has long required finance lenders to obtain licenses. Financial Code § 22100 already prohibits a person from engaging in the business of a finance lender or broker without a CFL license. AB 2116 potentially adds something quite different: a direct consequence affecting the enforceability of the underlying commercial agreement.
Consider what happens if your enter into a covered $400,000 transaction with a California business. The customer defaults while owing you $300,000. Were you properly licensed when you entered into this transaction? If the answer is no, it could be fatal to any attempt to recover the balance. You might even have to return whatever you have collected before the default.
That Would Be a Significant Change in California Law
Under existing California law, violation of the CFL by a commercial lender does not automatically render the underlying commercial loan void.
The existing CFL reflects that distinction. Financial Code § 22780 provides criminal penalties for willfulviolations involving commercial loans and leaves substantial enforcement authority with the DFPI. Unlike the provisions governing certain consumer loans, however, it does not declare a commercial loan void or unenforceable merely because the lender violated the CFL or lacked the required license.
AB 2116 appears to do precisely that for covered commercial financing agreements. And the bill does not say that the licensing violation must be willful before the agreement becomes unenforceable. That is potentially a very big change.
What About a Private Right of Action?
There is another important distinction. In Lagrisola v. North American Financial Corp., 96 Cal.App.5th 1178 (2023), borrowers alleged that their lender had made hundreds of California loans without the required finance lender’s license. They attempted to pursue claims directly under Financial Code §§ 22100 and 22751.
The Court of Appeal held that those statutes did not create a private right of action. The CFL established an administrative enforcement structure, and the court declined to create a private remedy the Legislature had not expressly authorized.
AB 2116 does not expressly say that a commercial financing recipient can sue an unlicensed provider for damages either. So it may be inaccurate to characterize § 22658 as creating a new affirmative private cause of action. But it may create something almost as consequential. It gives the customer a direct defense to enforcement of the contract.
A customer sued by an unlicensed provider would seemingly not have to wait for the DFPI to act or persuade a court to imply a private statutory cause of action. Since the Legislature itself would have declared the agreement unenforceable, the recipient could simply ignore the provider.
For a commercial finance company trying to collect several hundred thousand dollars, the distinction between a “private cause of action” and a “complete defense to my collection lawsuit” may be largely academic.
This Does Not Appear to Be an Accident
The legislative history makes § 22658 particularly interesting. Earlier California efforts to regulate non-loan commercial financing did not contain the same automatic unenforceability provision. SB 869, introduced during the 2023-2024 legislative session, also proposed bringing commercial financing providers into the CFL licensing regime. That legislation provided regulatory enforcement mechanisms against unlicensed providers but did not simply declare their financing agreements unenforceable.
AB 2116 itself originally followed a registration approach. Then, on June 4, 2026, the bill was substantially amended to establish a CFL licensing regime. The unenforceability provision appeared with it.
More importantly, the Senate Banking Committee specifically considered the provision. The Committee identified the need to clarify when a commercial financing transaction would be unenforceable because of the provider’s licensing status. The Legislature’s response was not to delete the remedy.
Instead, the bill was amended to protect transactions entered into before January 1, 2028 and providers that timely submit complete license applications that remain pending. Those exceptions now appear in § 22658.
In other words, the unenforceability language does not appear to be some drafting provision that wandered unnoticed into the bill. Someone in Sacramento apparently knows it is there.
Which License?
There is one additional issue the industry may want clarified before AB 2116 becomes law.
Commercial lenders are already required to hold finance lender licenses under the CFL. AB 2116, however, creates “commercial financing provider” as a separate licensing category.
The legislative history strongly suggests that existing CFL-licensed commercial lenders are not supposed to obtain a second license merely because they continue making the commercial loans they are already authorized to make. The Senate Judiciary Committee expressly recognized that providers of commercial loans are already subject to CFL licensing.
The statutory language, however, could be clearer. § 22658 ties enforceability to the licensing status of the “commercial financing provider,” while the bill elsewhere distinguishes between a licensed “finance lender” and a licensed “commercial financing provider.”
At least one industry trade association has already raised concerns about regulatory duplication and compliance uncertainty resulting from the separate licensing structure. Ordinarily, that might be the sort of ambiguity eventually resolved by DFPI regulations or interpretive guidance. But when choosing the wrong licensing category could potentially make a $400,000 agreement unenforceable, statutory clarity would seem preferable.
The Bottom Line
AB 2116 remains proposed legislation. Its language can still change before the Legislature is finished with it. But commercial lenders, factors, equipment finance companies, and other providers should be watching much more than the bill’s new licensing requirements.
California appellate law presently recognizes that a violation of the CFL does not, by itself, automatically invalidate a commercial loan. AB 2116 would expressly provide that a covered commercial financing agreement is not enforceable unless the provider satisfies the bill’s licensing requirements.
That is not simply another regulatory penalty. It changes what can happen when the customer stops paying.
If that is what the Legislature intends, commercial finance companies doing business in California will need to treat licensing as something considerably more important than another box on the compliance checklist.
Under AB 2116, the most expensive mistake a commercial finance company makes may not be making a bad credit decision.
It may be making a good one without the right license.
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