California Will Soon Require Novel Disclosure Requirements Providers Of Commercial Financings

In February, I noted the introduction of a bill that would require any person engaged in the business of commercial financing to provide specified disclosures to prospective borrowers.  On September 30, Governor Brown signed the bill, SB 1235, into law.  Although the law will take effect on January 1, 2019, implementation will require the adoption of regulations by the California Department of Business Oversight.

The new law applies to a "commercial financing" which is defined as an "accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes."  The specified disclosure must be made to a "recipient" which is defined as "a person who is presented a specific commercial financing offer by a provider that is equal to or less than five hundred thousand dollars ($500,000)".  Several types of lenders, including depository institutions, will not be subject to the new disclosure requirements. 

Undoubtedly numerous questions will arise as lenders and the Department of Business Oversight struggle to implement this new requirement.  One thing is certain, the cost of credit for small business borrowers will increase.