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MCA Laws in California: What Business Owners Need to Know

Bar Alezrah

10 min read

March 27, 2026

Reviewed for accuracy. Based on real experience.

California has emerged as one of the leading states in MCA regulation, primarily through its landmark SB 1235 disclosure law. If you are a California business owner considering a merchant cash advance, or if you already have one, the state offers some of the strongest transparency protections in the country.

This guide covers what California law requires of MCA companies and how those protections help you as a business owner.

Current MCA Regulations in California

California does not classify MCAs as loans, which means they fall outside the state's traditional lending regulations. However, California has taken a different approach by focusing on disclosure and transparency rather than trying to regulate MCAs as lending products.

The state's position is that even if MCAs are not technically loans, business owners deserve to understand the true cost of the financing they are taking on. This philosophy led to the passage of SB 1235, which is now the cornerstone of MCA regulation in California.

SB 1235: The Commercial Financing Disclosure Law

Senate Bill 1235, signed into law in 2018 with regulations finalized by the California Department of Financial Protection and Innovation (DFPI), requires commercial financing providers including MCA companies to give small businesses standardized disclosures before a transaction is finalized.

The required disclosures include:

Total amount of funds provided. The exact dollar amount the business will receive.
Total cost of financing. The total dollar amount the business will pay over the life of the advance, including all fees.
Annual percentage rate (APR). An estimated APR that allows business owners to compare the cost of an MCA to traditional loans and other financing options.
Payment amounts and frequency. How much will be debited and how often (daily, weekly, etc.).
Prepayment policies. Whether you can pay off the MCA early and whether doing so reduces the total cost.
Total dollar cost of the financing. A plain-language breakdown of what the financing will cost from start to finish.

This is a game-changer because MCA companies have historically used factor rates (like 1.35) instead of APR, which makes it nearly impossible for business owners to compare costs. A factor rate of 1.35 on a 6-month MCA translates to an APR of roughly 70% or more, but most business owners would never know that without the disclosure.

Confession of Judgment Rules

California has strong procedural protections that make confessions of judgment difficult to enforce. Under California law:

COJs entered into before a dispute arises are generally void and unenforceable in California courts
California courts will not domesticate (enforce) out-of-state COJ judgments without giving the debtor an opportunity to challenge them
Business owners in California who had COJs filed against them in New York courts have successfully argued that those judgments cannot be enforced in California

This is a significant protection. While a New York-based MCA company might obtain a COJ judgment in New York, actually collecting on that judgment against a California business is much harder because California courts provide procedural safeguards.

If an MCA company threatens you with a confession of judgment and your business is in California, consult a California attorney immediately. You likely have strong defenses.

UCC Filing Rules

MCA companies operating in California file UCC-1 financing statements with the California Secretary of State. These filings create a public record of the MCA company's claim on your business receivables.

What you need to know about UCC filings in California:

You can search for UCC filings against your business through the California Secretary of State business portal
UCC filings in California are effective for five years from the date of filing
When you pay off an MCA, the funder must file a UCC-3 termination statement within 20 business days of receiving a written demand from you
If the funder fails to terminate the filing after receiving your demand, you may have a claim for damages under California Commercial Code Section 9625

Multiple UCC filings from different MCA companies (a sign of MCA stacking) can make it extremely difficult to obtain traditional financing. Check your filings regularly.

Consumer Protection Laws That Apply

California has some of the strongest consumer protection laws in the country, and several apply to MCA transactions even though they are technically business transactions.

Unfair Competition Law (UCL)

California's UCL (Business and Professions Code Section 17200) prohibits unfair, unlawful, or fraudulent business practices. This statute has been used by business owners to challenge MCA agreements that involve deceptive terms, hidden fees, or misleading representations about the cost of financing.

The UCL is powerful because it allows claims even when the specific conduct is not addressed by another statute. If an MCA company engages in practices that are unfair or deceptive in any way, the UCL may provide a remedy.

DFPI Oversight

The California Department of Financial Protection and Innovation (DFPI) has regulatory authority over commercial financing providers including MCA companies. The DFPI can investigate complaints, take enforcement actions, and issue guidance on compliance with California's disclosure requirements.

If you believe an MCA company has violated California law, filing a complaint with the DFPI is an important step.

Recent Legislation and Court Cases

California continues to strengthen its MCA regulatory framework:

DFPI enforcement actions. The DFPI has taken action against commercial financing providers that failed to comply with SB 1235 disclosure requirements, resulting in fines and corrective orders.
Licensing requirements. California requires certain commercial financing companies to register with the DFPI under the California Financing Law. MCA companies that fail to register face enforcement action.
Court decisions. California courts have been receptive to arguments that MCAs with fixed daily payments and no true reconciliation are actually loans subject to usury limits. California's constitutional usury limit is 10% for non-exempt lenders.
Proposed legislation. Lawmakers have introduced bills to further strengthen disclosure requirements and create a licensing regime specifically for MCA companies.

What California Business Owners Should Do

If you are considering an MCA in California or already have one, take these steps:

Demand SB 1235 disclosures. The MCA company is legally required to provide them. If they refuse or cannot provide standardized disclosures including an APR estimate, that is a red flag.
Compare the APR to other options. Use the disclosed APR to compare the MCA cost to SBA loans, business lines of credit, or invoice factoring. The APR will almost certainly be much higher.
Search your UCC filings. Check the California Secretary of State website for any existing liens on your business. Multiple filings can damage your ability to get other financing.
Know your COJ protections. If an MCA company threatens a confession of judgment, know that California provides strong protections. Do not assume a COJ filed in another state will be enforceable here.
File complaints when warranted. If an MCA company fails to provide disclosures or engages in deceptive practices, file a complaint with the DFPI.

Helpful Resources

California Department of Financial Protection and Innovation (DFPI) for complaints and regulatory information
California Attorney General for consumer and business protection
SBA San Francisco District Office for alternative financing resources
California Small Business Development Centers for free business counseling

What Is a Merchant Cash Advance? — understand how MCAs work before diving into the legal details
MCA Laws by State — see how your state compares to others
MCA Contract Red Flags — 8 warning signs in MCA contracts
MCA Confession of Judgment — the most dangerous clause in your contract
MCA Cost Calculator — calculate the true cost of any MCA offer

Frequently Asked Questions

Does California require MCA companies to disclose APR?

Yes. Under SB 1235 and its implementing regulations, MCA companies must provide California business owners with standardized disclosures that include an estimated annual percentage rate. This allows you to compare the true cost of an MCA to other financing options.

Can an MCA company enforce a confession of judgment against my California business?

California has strong protections against confessions of judgment. COJs signed before a dispute arises are generally unenforceable in California courts. Even if a COJ judgment is obtained in another state like New York, California courts provide procedural safeguards before it can be enforced here.

Where do I file a complaint against an MCA company in California?

File a complaint with the California Department of Financial Protection and Innovation (DFPI) at dfpi.ca.gov. You can also file with the California Attorney General at oag.ca.gov. Both agencies investigate complaints against commercial financing providers.

Is there an interest rate cap on MCAs in California?

MCAs are not classified as loans in California, so usury limits do not directly apply. However, if a court determines that an MCA is actually a loan (due to fixed payments, no reconciliation, etc.), California's constitutional usury limit of 10% for non-exempt lenders could apply, potentially voiding the agreement.

Sources

California Department of Financial Protection and Innovation. Regulatory oversight of commercial financing in California.
California Legislature. SB 1235. Text of California's commercial financing disclosure law.
SBA San Francisco District Office. Federal small business resources for California businesses.
California Small Business Development Centers. Free counseling and resources for California small businesses.