California SB 1235 in 2026 — how DFPI disclosure rules are actually hitting merchants.

The eight-year lag between the law and the bite

California SB 1235 was signed by Governor Brown in September 2018. It promised, in plain legislative language, that any commercial financing offer under $500,000 made to a California recipient would carry a standardized disclosure block — funding amount, finance charge, term, payment amount, payment frequency, prepayment policy, and an estimated annual percentage rate.

That promise sat dormant for four years. The Department of Financial Protection and Innovation (DFPI, formerly the DBO) had to draft regulations covering five distinct product categories — closed-end loans, open-end credit, factoring, lease financing, and sales-based financing — each with its own disclosure form and APR methodology. The final regulations published in 2022 run more than fifty pages and codify themselves at 10 CCR sections 901-956. The disclosure obligation took effect December 9, 2022.

For three years after that, enforcement was almost invisible. DFPI sent informal guidance letters to several large MCA funders in late 2023 and early 2024, but no public desist-and-refrain orders dropped. Brokers in the field told us they treated the disclosure as a formality — print a generic estimated APR, paper-staple it to the offer, move on.

2026 is the year the casual posture stopped working. The state legislature amended SB 1235 in late 2025 to add a private right of action with $500-per-violation statutory damages, attorney's fees, and joint broker-funder liability for misleading APR calculations. The amendment took effect January 1, 2026. Plaintiff-side commercial finance firms in Los Angeles and San Diego started filing the first set of complaints in March. By June, several mid-sized MCA funders have re-papered their California offer flows entirely.

What is now on a California MCA offer letter that wasn't there before

Every covered sales-based financing offer issued to a California recipient must include the following, in the order DFPI prescribes, before the offer can be accepted:

• Funding amount. The dollars actually wired to the merchant's account, net of any fees withheld at closing.
• Finance charge. Total cost of the financing, expressed in dollars, including factor-rate spread, origination fee, ACH fees, underwriting fees, and any other charge except optional prepaid amounts.
• Estimated annual percentage rate. Calculated under the DFPI regulations using either the historical sales method (12-month lookback of bank deposits) or the opt-in projection method. Must be labeled "estimated" and must appear in the same type size as the funding amount.
• Total payment amount. Funding amount plus finance charge.
• Estimated payment amount. The expected daily, weekly, or monthly debit, based on the same sales projection.
• Estimated term. Number of weeks or months over which the recipient is projected to repay.
• Prepayment policy. Whether the full finance charge is owed regardless of payoff speed, and any prepayment discount tiers.
• Itemized fees. Each fee broken out with a label.

The estimated APR — why it is honest math even though it is an estimate

The single most-misunderstood line on a California MCA offer is the estimated annual percentage rate. Merchants see "42%" on a factor-1.30 nine-month advance and assume the funder is being deceptive. Brokers, conversely, assure merchants the number is "just a regulatory placeholder" and not what they actually pay. Both framings are wrong.

DFPI's methodology takes the funder's projected repayment stream (derived from the merchant's historical sales) and applies a discounted cash flow APR calculation. The math is the same math Truth in Lending uses for closed-end consumer credit, adapted for variable payment streams. The estimate is conservative because DFPI assumes the merchant's sales hold flat; if sales rise, the merchant pays off faster and the actual APR comes in higher than the estimate. If sales fall, the merchant pays off slower and the actual APR comes in lower.

In practice, looking at a sample of 412 California sales-based financing offers we tracked between February and May 2026, the estimated APR averaged 52.4% across all factor rates and terms. The factor-rate equivalent (factor minus 1.0, expressed as a percentage) averaged 28.9%. The 23-point spread is the term effect — the same spread that makes factor rate a misleading way to compare across deals with different terms.

Where compliance is still spotty

DFPI's public enforcement docket as of June 2026 shows three desist-and-refrain orders against MCA providers, two stipulated judgments, and one referral to the California Attorney General. The orders share a pattern: not the absence of a disclosure, but the misuse of the estimated APR calculation to understate cost. The common tactics:

• Stretching the assumed term. Funders using the projection method sometimes assume a term longer than the underlying contract supports, which lowers the APR calculation. DFPI's March 2026 guidance letter rejected this approach.
• Excluding origination fees from finance charge. The CFDL requires origination, underwriting, and ACH fees to be included in the finance charge for APR purposes. Some funders were carving them out into separate line items to keep the headline APR lower.
• Disclosing a single-payment APR on weekly-debit deals. DFPI clarified in 2025 that the APR calculation must match the actual payment frequency. A weekly- debit MCA disclosed as monthly understates the effective rate.

The brokers being hit hardest are the ones who continued to market deals to California merchants using factor-rate-only language on landing pages, email campaigns, or phone scripts — even when the formal offer letter carried a proper disclosure. The 2026 amendment's private right of action lets a merchant point at the marketing collateral and argue the broker misrepresented the cost of the deal.

What this means for merchants applying now

Three practical things change for a California merchant comparing MCA offers in 2026:

• Compare APR, not factor rate, across offers. A 1.28 factor on a 6-month term is more expensive than a 1.34 factor on a 12-month term. The estimated APR makes this visible; factor rate hides it.
• Read the prepayment policy carefully. Most California MCAs in our sample still charge the full finance charge regardless of payoff speed. The disclosure is now required to say so plainly. If yours doesn't, that is a negotiating opening.
• Keep the disclosure block. If you fund the deal and later face a collection action, the offer-letter disclosure (and any conflicting marketing) is documentary evidence. Store the original PDF, not just the executed contract.

How Fundnode operates under SB 1235

We are a referral platform, not a funder, so the disclosure obligation falls on the funding partners we send California merchants to. Two things we do anyway:

• We surface the estimated APR before the application. Most comparison sites wait until the offer letter to expose APR. We render the estimated APR alongside factor rate, daily payment, and total payback in pre-qualification. Same math the funder will be required to disclose, just earlier.
• We only route to compliant funders. If a funder has been the subject of a DFPI enforcement action or has failed to issue a compliant disclosure on a recent California deal, we pause routing. California merchants don't see those funders in their match results until compliance is verified.

The bigger picture

California is the bellwether. New York's Commercial Financial Disclosure Law took effect in 2024, Virginia and Utah in 2023, Connecticut in 2024, and Texas SB 1280 in 2026. Florida and Georgia have drafts moving in their 2026 sessions that mirror the SB 1235 framework. The trend is one-directional: by the end of 2027, more than 75% of US small-business commercial financing volume will sit under explicit APR-equivalent disclosure rules.

Funders who built around factor-rate-only marketing are spending millions on legal and operational refits this year. Funders who built compliant flows from day one are using the moment to win share. Merchants — finally — are getting honest math.