California SB 1235 —
disclosures, in plain English.

California Senate Bill 1235 was signed into law in September 2018. The text of the statute, however, was only the beginning. The bill directed the California Department of Business Oversight — now the Department of Financial Protection and Innovation, or DFPI — to write detailed implementing regulations specifying exactly what each disclosure form had to contain, how each cost figure was to be calculated, and which product types were covered. Drafting those regulations took nearly four years. The final rules were adopted in 2022 and took full operative effect on December 9, 2022. For roughly five years between signing and effective date, California small businesses lived under a law that existed on paper but did not yet have teeth.

That changed in December 2022. From that date forward, any non-bank commercial financing provider extending an offer of $500,000 or less to a recipient with a principal place of business in California is required to deliver a standardized, DFPI-prescribed disclosure form before the recipient signs the contract — and to obtain the recipient's signature on the disclosure itself.

Who has to give the disclosure

The law applies to non-bank providers of covered commercial financing. Federally insured depository institutions — banks and credit unions — are exempt. So are real-estate-secured loans and certain de minimis transactions (currently five or fewer per twelve-month period). What's left is essentially the entire alternative finance and fintech ecosystem: independent merchant cash advance funders, online term lenders, factoring companies, asset-based lenders, and equipment finance providers whose deals fall under the dollar threshold.

The trigger is the recipient's location, not the funder's. A funder based in Florida or New York extending an offer to a California restaurant is fully subject to SB 1235. The funder does not need a California office to be regulated; it needs a California customer. That makes the law functionally national in reach — every serious commercial finance provider that wants to do business in California must maintain SB 1235-compliant disclosure infrastructure.

What the disclosure must contain

The DFPI regulations prescribe a specific disclosure form for each covered product type. The core data fields are largely the same across forms:

Amount financed — the actual capital delivered to the recipient, net of any fees withheld at funding.

Total dollar cost of financing — the total of all amounts the recipient is contractually obligated to pay, minus the amount financed. On a $50,000 MCA at a 1.40 factor, the total cost of financing is $20,000.

Annual percentage rate or APR-equivalent — the cost of the financing expressed as an annualized percentage, calculated under the methodology specified in the regulations. For an MCA, this is an estimated APR because the term is not fixed; the regulations prescribe an assumed payback period based on the funder's historical performance.

Payment amounts and frequency — the dollar amount, frequency, and number of payments. For an MCA, the disclosure shows the daily or weekly debit amount and the estimated number of payments.

Average monthly cost — the average monthly dollar outflow the business will experience, useful for stress-testing the deal against monthly cash flow.

Prepayment policy — a clear statement of whether the recipient can pay early, whether prepayment reduces the total cost, and the formula for calculating any payoff discount. This is one of the most consequential sections, because the answer for many MCAs is that prepayment does not reduce the dollar cost — the recipient still owes the full payback amount even if they pay early.

How the APR is calculated on an MCA

Merchant cash advances do not have a fixed term. The recipient agrees to deliver a fixed total — say, $70,000 on a $50,000 advance at 1.40 — but the time it takes to deliver that depends on the recipient's revenue. The DFPI regulations addressed this by requiring the funder to estimate the term using either historical data on comparable advances or the recipient's actual revenue history. The estimated term is then used to compute an estimated APR.

The result is often a number that surprises merchants. A six-month MCA at a 1.40 factor produces an estimated APR in the neighborhood of 70% to 90%. A nine-month MCA at a 1.30 factor lands closer to 50%. These numbers reflect the honest annualized cost of short-duration capital. They are not intended to make MCAs look bad — they are intended to make them comparable to other financing options on a like-for-like basis. A 60% APR on an MCA and a 9% APR on an SBA loan are now legible to the same buyer.

What an SB 1235-compliant offer looks like

A California merchant receiving a compliant offer will see — typically as a separate PDF emailed alongside the contract, or as the first page of the contract itself — a disclosure form bearing the DFPI's prescribed format. The form will be signed by the funder, contain all of the data fields above, and include a signature line for the recipient. The recipient signs the disclosure separately from the contract, acknowledging receipt.

If the offer arrives without a disclosure, that is a compliance problem on the funder's side. A compliant California funder has the document ready before sending the offer. The disclosure is not a gotcha; it's a basic operating requirement, and any funder serious about California business has automated it.

What to do if you don't receive a disclosure

Ask. A simple email — "Please send me the SB 1235 disclosure form for this offer before I sign" — should produce the document within the same business day. If it doesn't, you have learned something important about who you're working with.

You can also report non-compliance to the DFPI directly. The Department maintains a public complaint portal and has enforcement authority including civil penalties. Patterns of non-compliance can trigger broader investigation. The agency has been measured but active in its early enforcement posture.

How Goliath approaches this

Goliath is a direct lender. We deliver clear cost disclosures on every offer regardless of which state the business operates in — not because every state requires it, but because we believe a merchant making a six-figure financial decision should see the numbers in plain English. In California specifically, our offers include the full SB 1235 disclosure pack: amount financed, total cost, estimated APR, average monthly cost, payment schedule, and prepayment terms. If a number on our offer looks high, we'd rather you see it before you sign than after.

The bigger picture is that California led the country in commercial finance disclosure, and other states have since followed the model. A California operator shopping a deal in 2023 already has a structured way to compare offers from different funders. That alone has changed the conversation in the industry.

This article is general information, not legal advice. Commercial finance laws evolve quickly; consult licensed counsel in your jurisdiction before making decisions based on this content.