California’s New Small Business Commercial Financing Regulations

On January 1, 2024, California Senate Bill 666 (S.B. 666), legislation expanding the requirements of the California Civil Code as it relates to small business commercial financing transactions, went into effect.

The goal of S.B. 666 is to protect small business borrowers by restricting the types of fees they may be charged by brokers or providers of certain business loans.³ In this article, we address key issues arising under S.B. 666 for both borrowers and lenders.

For Business Borrowers

Is my business protected by S.B. 666?

It depends on your ownership structure, relative presence in your industry, location, and size (in personnel and revenue). S.B. 666 applies to a “small business,” which is defined as: 

• an independently owned and operated business that is not dominant in its field of operation, 
• the principal office of which is located in California, 
• the officers of which are domiciled in California, and 
• that, together with affiliates, has 100 or fewer employees and average annual gross receipts of $15,000,000 or less over the previous three years.⁴

If I am protected under S.B. 666, what does that mean for my financing?

Protections provided under S.B. 666 only extend to “commercial financing,” which is defined as “an accounts receivable purchase transaction.”⁵ Statutory examples of commercial financing include a “factoring, asset-based lending transaction; commercial loan; commercial open-end credit plan; or lease financing transaction” for business purposes.⁶ A commercial financing transaction secured by real property is not covered under S.B. 666.⁷ Certain vehicle financings of at least $50,000 are also not covered.⁸

If you are a small business with commercial financing covered under S.B. 666, your broker or provider may not charge you a fee in any of the following categories:

• ACH payments under the financing agreement (except fees for insufficient funds)
• Providing a statement balance
• Additions to the origination fee without “clear corresponding service provided”
• Monitoring collateral (except if your delinquency continues beyond 60 days)
• Filing or terminating a UCC lien against your business’s assets (except if the fee is no more than 150% of the actual cost of filing or termination).⁹

Now that S.B. 666 is in effect, you can expect your lender to review your financing agreement for the prohibited fees above. If any are found, the lender may eliminate the fee, which would reduce the total dollar cost of your financing.¹⁰ Careful review of any disclosures from your lender is always advisable, and borrowers should ask questions if anything is unclear or if there is an unexpected change.

If I am not a protected small business, how might S.B. 666 affect me? 

It is possible that lenders may revise their overall fee structures to account for the restrictions of S.B. 666, and some of these revisions may be implemented broadly across all borrowers, not only for small businesses. Broad revisions may help to reduce risk for the lender in the absence of a regulatory safe harbor that provides bright lines for identifying “small business” borrowers.¹¹ For the same reason, lenders also may conduct more extensive diligence on borrowers to assess the applicability of S.B. 666. Looking even further ahead, other states could follow California’s lead and impose similar regulations on fees for commercial financing, so businesses should monitor new developments in this area.

For Lenders

Which lenders are covered by S.B. 666?

A “covered entity” under S.B. 666 is a provider or a broker who does not fall within the statutory categories of excluded entities.¹² It is important to highlight that, under the law:

• Lending activity is treated differently from brokering. An example of a “broker” is a person who counsels prospective borrowers and negotiates their commercial financing with a provider.¹³
• Lending activity fits under the definition of a “provider,” which is defined as “a person who extends a specific offer of commercial financing to a recipient.”¹⁴ A fintech who offers commercial financing may be a “provider” if, for example, the fintech is “a nondepository institution” that contracts with “a depository institution to arrange for the extension of commercial financing by the depository institution” through a digital platform “administered” by the fintech and the fintech’s role in arranging the financing goes beyond simply extending “a specific offer of commercial financing or lending on behalf of a depository institution.”¹⁵
• The following entities are excluded from the requirements of S.B. 666:some text
  • Depository institutions, including a bank, trust company, industrial loan company, federally chartered savings and loan association, federal savings bank, federal credit union, savings and loan association, savings bank, or credit union.¹⁶ 
  • Lenders regulated under the federal Farm Credit Act of 1971, such as the Farm Credit System.¹⁷
• De minimis exclusions are also available if either of the following apply to a person’s commercial financing transactions in California within a twelve month period:some text
  • only one commercial financing transaction is made.¹⁸
  • no more than five commercial financing transactions are made that are incidental to the business of that person.¹⁹

Which borrowers and loans are covered by S.B. 666?

Please see the answers above for “Is my business protected by S.B. 666?” and “If I am protected under S.B. 666, what does that mean for my financing?”

What are some of the consequences of violating S.B. 666?

Broad relief is available for violations of S.B. 666, including:

• actual damages (including the amount of the prohibited fees)²⁰
• statutory damages (between $500 to $2,500)²¹
• injunctive relief²² 
• attorney’s fees and costs²³

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A court also has discretion to grant other forms of relief as the court “deems proper.”²⁴ 

If you are either a borrower or lender and have questions about California’s new legislation, please contact one of Scale LLP’s attorneys to discuss your situation.

The above summary is intended to serve as a general overview of the legal issues discussed. We encourage you to reach out to an attorney at Scale LLP for a more detailed evaluation and review of your situation. Scale LLP is a full service law firm with deep experience in financial services, including lending. 

DISCLAIMER: The above materials reflect information available to Scale LLP as of the date of publishing such materials. The contents are intended to provide a general guide to the subject matter therein, and should not be treated as legal advice regarding individual situations. No attorney-client relationship between you and Scale LLP will be formed based on your use of these materials unless Scale LLP expressly agrees (or has agreed) to enter into such a relationship with you.

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^[3] Cal. Civ. Code § 1799.302 (2023).

^[4] Id. at § 300(j).

^[5] Cal. Civ. Code § 1799.300(c) (2023) (defining “commercial financing” with reference to Cal. Fin. Code § 22800); Cal. Fin. Code § 22800(e) (2023).

^[6] Cal. Fin. Code § 22800(d)(1) (2023).

^[7] Cal. Civ. Code § 1799.301(c) (2023).

^[8] Id. at  § 1799.301(f)–(g).

^[9] Id. at  § 1799.302.

^[10] Cal. Fin. Code § 22802(b)(2) (2023).

^[11] See, e.g., Cal. Code Regs. tit. 10, § 954(b) (2024) (allowing a provider to rely on “the business address provided by the recipient in the application for financing” in “determining whether a recipient’s business is ‘principally directed or managed from California’ ” under California's commercial finance disclosure law).

^[12] Cal. Civ. Code §§ 1799.300(e),1799.301 (2023).

^[13] Id. at  § 1799.300(b)(1)(C)–(D).

^[14] Id. at  § 1799.300(g).

^[15] Id.

^[16] Id. at §§ 1799.301(a); 1799.300(f).

^[17] Id. at § 1799.301(b) (2023); 12 U.S.C. § 2002(a) (2023).

^[18] Cal. Civ. Code § 1799.301(d) (2023).

^[19] Id. at § 1799.301(e).

^[20] Id. at § 1799.303(a)(1).

^[21] Id. at § 1799.303(a)(2).

^[22] Id. at § 1799.303(a)(3).

^[23] Id. at § 1799.303(a)(4).

^[24] Id. at § 1799.303(a)(5).