California made legislative history when it became the first state in the nation to require consumer-style lending disclosures for commercial financing transactions. The Small Business Truth-in-Lending Law (SBTL), enacted through Senate Bill 1235, fundamentally changed how non-bank lenders communicate the cost of credit to their small business borrowers. Since its passage, the law has served as a model for similar legislation in other states and has been fully implemented through regulations administered by the California Department of Financial Protection and Innovation (DFPI), formerly the Department of Business Oversight.
This article provides an updated overview of the SBTL’s requirements, its scope of coverage, and what private lenders operating in California need to understand about compliance in 2025.
The Gap That SB 1235 Was Designed to Fill
For decades, the federal Truth in Lending Act (TILA) has required lenders to provide standardized disclosures, including annual percentage rates, to consumers obtaining mortgages, auto loans, credit cards, and other personal credit products. These disclosures enable borrowers to compare financing options on an apples-to-apples basis before committing to a particular loan.
No equivalent federal requirement has ever existed for commercial lending transactions. Small business borrowers seeking working capital, equipment financing, or merchant cash advances were left to navigate a marketplace where pricing could be presented in vastly different formats, making meaningful comparison virtually impossible.
The consequences were significant. Finance companies could present loan costs as a flat percentage, such as 20%, without disclosing that the effective annual percentage rate was 55% or higher when the repayment term and fee structure were factored in. Small business owners frequently committed to financing arrangements without fully understanding the true cost of the capital they were receiving.
What SB 1235 Requires
The SBTL mandates that covered lenders provide clear, standardized disclosures to small business borrowers before finalizing any covered commercial financing transaction. The required disclosures include:
1. Total amount of funds provided to the borrower 2. Total dollar cost of the financing, encompassing all fees and charges 3. Term or estimated term of the financing arrangement 4. Payment method, frequency, and amount, including whether payments are fixed or variable 5. Prepayment policies, including any penalties or discounts for early repayment 6. Annualized rate reflecting the total cost of financing expressed as a yearly percentage
The annualized rate disclosure is the centerpiece of the law. By requiring all covered lenders to express their financing costs in a uniform annual percentage format, the SBTL enables small business borrowers to make direct comparisons between competing offers regardless of differences in loan structure, repayment frequency, or fee arrangements.
Scope of Coverage
Transactions Covered
SB 1235 applies to “commercial financing” transactions between $5,000 and $500,000 that are intended primarily for business purposes rather than personal, family, or household use. The law defines “commercial financing” broadly to include:
- Asset-based lending
- Accounts receivable financing
- Commercial term loans
- Open-ended lines of credit
- Factoring arrangements
- Merchant cash advances
- Lease financing transactions
Who Must Comply
The law targets non-depository financial institutions, including private money lenders, merchant cash advance providers, online lending platforms, and other non-bank finance companies. Traditional depository institutions such as commercial banks, savings associations, and credit unions are exempt from the SBTL’s requirements.
Key Exemptions
In addition to the depository institution exemption, the SBTL does not apply to transactions below $5,000 or above $500,000, nor does it cover financing that is primarily for personal, family, or household purposes (which falls under existing federal TILA requirements).
Regulatory Implementation and Enforcement
After SB 1235 was signed into law by Governor Jerry Brown on September 30, 2018, the Department of Business Oversight (now the DFPI) undertook an extensive rulemaking process to establish the specific calculation methodologies and disclosure formats that covered lenders must use.
The DFPI’s final regulations addressed several critical implementation questions, including:
- How to calculate the annualized rate for different types of financing products, including those with irregular payment schedules or variable pricing
- Standardized disclosure formats that ensure consistency across different lender types and product categories
- Timing requirements for when disclosures must be provided relative to the borrower’s commitment to the transaction
These regulations are now fully in effect, and the DFPI actively enforces compliance through its examination and supervision programs.
The National Ripple Effect
California’s leadership on commercial lending disclosure has triggered a wave of similar legislation across the country. New York enacted its own commercial finance disclosure law in 2020, and several other states have introduced or passed comparable bills. The trend reflects a growing consensus among state legislators that small business borrowers deserve the same transparency protections that consumers have long enjoyed.
For private lenders operating across multiple states, this patchwork of state-level disclosure requirements creates significant compliance complexity. Each state’s law may differ in its coverage thresholds, disclosure elements, calculation methodologies, and enforcement mechanisms. Maintaining a comprehensive compliance program that accounts for these variations is essential.
Compliance Considerations for Private Lenders in 2025
Private lenders who originate commercial financing in California should ensure their compliance programs address the following areas:
Disclosure Timing and Delivery
Disclosures must be provided to the borrower before the transaction is finalized. Lenders should establish procedures that ensure disclosure documents are generated, reviewed, and delivered at the appropriate point in the origination workflow.
Rate Calculation Accuracy
The annualized rate calculation must follow the DFPI’s prescribed methodology. Lenders should verify that their loan origination systems are programmed to produce compliant rate calculations and should periodically audit their output for accuracy.
Record Retention
Lenders should maintain copies of all disclosures provided to borrowers, along with documentation demonstrating when and how those disclosures were delivered. These records are essential for responding to regulatory examinations and defending against potential enforcement actions.
Multi-State Coordination
Lenders operating in multiple states with commercial finance disclosure requirements should develop a unified compliance framework that identifies the applicable requirements in each jurisdiction and ensures that all mandated disclosures are provided accurately and on time.
Looking Ahead
The trajectory of commercial lending disclosure regulation points clearly toward expanded requirements at both the state and potentially the federal level. Private lenders who invest in robust compliance infrastructure now will be better positioned to adapt as additional states enact their own versions of the SBTL and as existing laws are amended to address gaps or incorporate new disclosure elements.
For assistance with California SBTL compliance, multi-state disclosure obligations, or other commercial lending regulatory matters, contact Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
