California MCA Disclosure Law SB 1235: What Borrowers Must Know

California Senate Bill 1235 is the most comprehensive merchant cash advance disclosure law in the United States. It requires MCA providers to disclose the true cost of an advance in a standardized format before funding, including an annualized rate that allows comparison to traditional loan products.

If you took an MCA in California and your lender did not provide these disclosures, you have rights worth understanding. If you are considering an MCA in California right now, you are entitled to specific information by law before you sign anything.

What SB 1235 Actually Requires

California SB 1235 was signed into law in 2018 and its implementing regulations, developed by the California Department of Financial Protection and Innovation, took full effect in December 2022. The law applies to commercial financing transactions including merchant cash advances offered to California-based businesses.

The core disclosure requirement is that before a borrower executes a financing agreement, the provider must give the borrower a written disclosure containing specific information in a standardized format designed by the DFPI.

The required disclosures include the total amount of funds provided to the borrower, the total dollar cost of the financing including all fees and charges, the term or estimated term of the financing, the method and frequency of payment, a description of prepayment policies, and critically, an annualized rate calculated using a specific methodology established by the DFPI.

That last element is what makes SB 1235 transformative compared to the pre-2022 status quo. Before the law took effect, MCA providers in California were under no obligation to translate their factor rate into anything resembling an annual percentage rate. A provider could quote a 1.40 factor rate without any disclosure that this represented a 200%+ annualized cost on a 90-day advance.

For how factor rates convert to APR, see what is a factor rate.

How the DFPI Calculates the Annualized Rate

The DFPI's methodology for calculating the annualized rate disclosure differs from the standard APR formula used for consumer loans under the federal Truth in Lending Act. This distinction matters because the numbers produced can differ, and comparing a DFPI-method disclosure to a consumer loan APR requires understanding the difference.

The DFPI method starts with the total repayment amount minus the advance amount, which produces the total dollar cost of the financing. It then divides that cost by the advance amount to produce a ratio. It then applies an annualization factor based on the estimated repayment term.

For a $50,000 advance with a 1.35 factor rate and a 120-day estimated term, the DFPI method produces an annualized rate in the range of 106% to 110% depending on the specific repayment schedule. This number must appear on the pre-contract disclosure form and the borrower must receive it before signing.

What Providers Are Required to Give You

Under SB 1235 and the DFPI regulations, you are entitled to receive a written disclosure document before signing your MCA agreement. The disclosure must:

• Be in the language in which negotiations were conducted. If your MCA was marketed to you in Spanish, the disclosure must be in Spanish.
• Use the standardized format specified by the DFPI. The format is designed to make comparison across different financing products easier by presenting information in a consistent layout.
• Clearly identify the annualized rate, the total payment amount, the total cost amount, and the estimated term.
• Be provided before execution of the financing agreement. A disclosure handed to you simultaneously with the contract and signature page does not satisfy the requirement.

The provider must retain a copy of the signed disclosure and make it available to the DFPI upon request.

What Happens If Your Lender Did Not Comply

The SB 1235 regulations give the DFPI authority to take action against providers who fail to comply with disclosure requirements. Violations can result in enforcement actions, fines, and in some cases suspension or revocation of a provider's ability to offer commercial financing in California.

From a borrower's perspective, the practical question is what a disclosure failure means for your specific contract. This is not a simple or uniform answer. The law does not automatically void contracts where disclosures were not provided. But a disclosure failure can be relevant in several ways.

It may be a factor in a broader legal challenge to the contract, particularly if combined with other issues such as misrepresentation of terms, refusal to reconcile, or use of a COJ. A lender who failed to comply with California law has weakened their position in any dispute about the fairness of the transaction.

It may also support a complaint to the DFPI, which has authority to investigate and take action against non-compliant providers. The DFPI maintains a public license database for commercial financing providers. If your MCA provider is not registered with the DFPI and they conducted business in California, that is a separate compliance issue beyond the disclosure requirement.

How California Compares to Other States

California SB 1235 was the first state law of its kind and served as the template for disclosure legislation in other states.

New York enacted its own commercial financing disclosure law in 2023, with regulations developed by the Department of Financial Services. New York's law is similar in structure to SB 1235 but with some differences in the annualized rate calculation methodology and the specific formatting requirements.

Utah passed commercial financing disclosure legislation that took effect in 2023. Virginia enacted a similar law the same year. Texas House Bill 700, which took effect in September 2025, extended disclosure requirements to Texas-based borrowers, making Texas one of the most recent major states to act on MCA transparency.

The federal government has not enacted equivalent requirements for commercial financing. The federal Truth in Lending Act applies to consumer loans, not business financing transactions. Federal disclosure requirements for commercial MCA products remain absent as of 2025, making state laws the primary protection mechanism for small business borrowers.

For a major enforcement example that pushed disclosure and other reforms, see the Yellowstone Capital settlement.

What to Do If You Are a California Borrower

If you are a California-based business owner who took an MCA after December 2022 and did not receive the required disclosure before signing, several steps are worth taking.

First, check whether your provider is registered with the DFPI. The DFPI maintains a searchable database of licensed commercial financing providers at dfpi.ca.gov. If your provider is not listed and is not exempt from registration, that is significant.

Second, review your contract documents for a disclosure form. It should be a separate document from the main MCA agreement, presented in the DFPI's standardized format. If no such document exists in your contract package, document that fact.

Third, if you are in a dispute with your lender or are experiencing financial distress related to your MCA, bring the disclosure issue to the attention of an attorney who handles MCA defense in California. The disclosure failure does not automatically void your contract, but it is a factor that an experienced attorney can assess in the context of your overall situation.

Fourth, consider filing a complaint with the DFPI at dfpi.ca.gov/file-a-complaint. The DFPI takes disclosure complaints seriously and your complaint contributes to the agency's enforcement picture for the industry.

Frequently Asked Questions

Does SB 1235 apply to my MCA if my business is in California but the MCA provider is based in another state?

Yes. SB 1235 applies to commercial financing transactions with California-based recipients regardless of where the provider is located. An out-of-state MCA provider offering advances to California businesses is subject to California's disclosure requirements.

What if my MCA was funded before December 2022 when the regulations took full effect?

The disclosure requirements apply to transactions executed after the regulations took effect. If your advance predates December 2022, the SB 1235 disclosure requirements do not directly apply, though earlier versions of the law may have imposed some requirements on your transaction depending on timing.

Can I get out of my MCA contract if my lender did not provide the required disclosure?

Non-disclosure does not automatically void the contract under current California law. But it is a relevant factor in any legal dispute and a basis for regulatory complaint. An attorney can advise on whether the disclosure failure, combined with other aspects of your situation, provides grounds to challenge the contract.

What is the DFPI and does it regulate MCA providers?

The California Department of Financial Protection and Innovation is the state's primary financial services regulator. It has authority over commercial financing providers operating in California under the California Consumer Financial Protection Law and the commercial financing statutes. MCA providers offering advances to California businesses are subject to DFPI oversight including registration requirements and the SB 1235 disclosure rules.

Are other states' disclosure laws as strong as California's?

California and New York have the most developed and actively enforced commercial financing disclosure frameworks as of 2025. Texas, Utah, and Virginia have enacted disclosure laws that are still developing in terms of regulatory implementation and enforcement. Federal disclosure requirements for commercial MCA products do not currently exist.

This article is for educational purposes only and does not constitute legal or financial advice. California law on commercial financing disclosure is developed through statute and DFPI regulation. Consult a licensed California attorney for advice specific to your situation and contract.