Articles by Robert F. Gage and Kate Fisher , Hudson Cook LLP

Brokers and Funders – Are You Ready for Changes to California Law Effective January 1, 2026?

December 20, 2025

California has a new law, California S.B. 362, impacting how brokers and funders communicate with merchants starting on January 1, 2026. The new law adds provisions to California’s Commercial Financing Disclosures Law (“CFDL”) which became effective in 2023 and established the first law requiring commercial financers and brokers (described in the CFDL as “providers”) to provide cost-of-funding disclosures to applicants. Here is an overview of what you need to know:

Don’t Say “Factor Rate”

Under S.B. 362, commercial financing providers are not allowed to use the term “rate” in a manner that is likely to deceive a recipient. A “recipient” is generally a person who receives an offer of commercial financing of $500,000 or less. The preamble to the new law (which is not part of the law but informs how the regulator will approach enforcement) gives the following example of what California means by likely to deceive:

• Describing the price of credit as “X% fee rate” or “Y% factor rate,” particularly when those “rates” diverge materially from the APR.

A factor rate will almost always be much lower than any APR. This means that California has effectively banned use of the term “factor rate” when communicating with applicants for loans, sales-based financing, merchant cash advance and yes – even factoring transactions. It is probably safe to talk in terms of “factor rates” internally. But, starting on January 1, 2026 – saying “factor rate” to a California recipient can get you into hot water.

Don’t Say “Interest Rate” Unless Referring to an Annual Simple Interest Rate

S.B. 362 also prohibits commercial financing providers from using the term “interest” in a manner that is likely to deceive a recipient. The preamble to the new law gives the following examples of what California means by likely to deceive:

• Describing the price of credit as “simple interest” when referring to a nonannual rate as opposed to a noncompounding annual rate that a reasonable person would understand “simple interest” to mean; and
• Describing the price of credit as an “interest rate” when describing a daily, weekly, or monthly rate and not an annual rate; and

This potentially impacts providers who describe the cost of commercial credit using a daily or weekly rate and describing that rate as “interest”. For example, loan agreements that use a daily, weekly, or monthly “interest rate” may need to be modified.

California Requires Brokers and Funders to Remind Recipients of the Disclosed “APR” or “Estimated APR”

S.B. 362 complicates post-offer negotiations between providers and recipients by requiring redisclosure of the APR or Estimated APR calculation already required by the CFDL. It does this by adding the following new provision to the CFDL:

• After extending a specific offer to a potential recipient, whenever a provider states a charge, pricing metric, or financing amount to the potential recipient for that specific offer during an application process for commercial financing, the provider shall also state the annual percentage rate of that commercial financing offer by using the term “annual percentage rate” or the acronym “APR.”

What this means for providers:

• The APR reminder requirement applies “during an application process.” The term “application process” is not defined, but it probably does not end until the recipient receives funding or the provider definitively declines to proceed with the financing.
• During the “application process,” anytime a provider communicates with the recipient and states a charge, pricing metric, or financing amount, the provider must remind the merchant of the APR or Estimated APR for that offer. Here are examples of how this might impact brokers and funders:

If a broker or funder calls or texts a merchant to check on whether the merchant plans to sign a financing agreement, any mention of the charges, pricing, or financing amount associated with that financing agreement would trigger a reminder of the APR or Estimated APR for that financing agreement. If a broker or funder has an online portal that includes information about a funding offer, that information would need to be accompanied by a statement of the APR or Estimated APR for that funding offer. If a funder speaks with a merchant in a funding call prior to funding the transaction, the funding call should include a reminder of the APR or Estimated APR for that funding offer.

New York Already has a Similar Law

New York already has similar requirements in its Commercial Financing Disclosure Law. See 23 N.Y. Admin. Code Section 600.1(f)(1). Accordingly, brokers and funders should implement these practices in New York as well.

This is only a high-level overview and not legal advice. If you have questions regarding how these laws impact your business, please contact knowledgeable counsel.

---

Bob Gage is a partner in Hudson Cook, LLP’s Michigan office. Kate Fisher is a partner in Hudson Cook, LLP’s Maryland office. https://www.hudsoncook.com/