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MCA vs. Factoring vs. Term Loans: How California Regulates Each Differently
If you are a financial services company operating in California, or extending financing to businesses located in California, you are operating in one of the most actively regulated commercial financing environments in the country. California was the first state to require commercial financing providers to deliver detailed, consumer-style cost disclosures to business borrowers and recipients of non-loan financing products. And the regulatory landscape has continued to expand since those original requirements took effect.
What makes California’s framework especially complex is that it treats different financing products differently. A merchant cash advance, a factoring arrangement, and a commercial term loan may all serve the same basic purpose, getting capital into the hands of a business that needs it, but California law imposes distinct licensing requirements, disclosure obligations, and compliance standards depending on how the transaction is structured. Understanding those distinctions is important for any company that provides, brokers, or otherwise facilitates commercial financing in or into the state.
At The Law Offices of Alan Abergel P.C., we regularly work with clients navigating the regulatory challenges that arise in this space. This article provides an overview of how California law treats each of these three common financing products and where the key regulatory differences lie.
It is important to understand the two main pillars of California’s commercial financing regulatory framework. The first is the California Financing Law. The CFL is the state’s primary licensing statute for finance lenders and brokers. It requires any person engaged in the business of making or brokering consumer or commercial loans in California to obtain a license from the California Department of Financial Protection and Innovation, commonly known as the DFPI.
The second pillar is the California Commercial Financing Disclosure Law, or CCFDL. The CCFDL imposes disclosure requirements on a broader range of commercial financing products than the CFL alone covers. While the CFL primarily governs “loans,” the CCFDL reaches beyond loans to include merchant cash advances, factoring transactions, leases, and other transactions.
These two frameworks interact in important ways. A company that makes California commercial loans must have a CFL license and must also comply with the CCFDL’s disclosure rules. A company that provides merchant cash advances may not need a CFL license—because a true non-loan MCA that is not legally structured as a loan and is not deemed to be loan accordingly to legal authority—is still subject to the CCFDL’s disclosure and reporting requirements. These differences in treatment have significant practical consequences for companies operating in the commercial financing space.
Just because a certain commercial financing provider calls their product in their agreements, other documents, and in general, "merchant cash advance," "factoring," "lease," etc. does not mean that such product is not a loan and does not require a CFL license for providing such product to California customers. A regulator such as DFPI as well as courts in case of court litigation, will investigate in detail the substance of such transaction and not just the title of the transaction and/or the provider's characterization of the transaction to determine if such transaction is a loan or not. Accordingly, the better practice is to retain an experienced and knowledgeable financial regulation attorney to examine in detail the California commercial financing provider's business model and issue a legal opinion about whether or not such transaction is a loan and if it requires a CFL and/or other California financial regulation license and/or if it is subject to CFL and/or CCFDL and/or other laws and regulations' requirements. These are not issues that can be discussed quickly in a phone conversation. The Law Offices of Alan Abergel, P.C. regularly examines various business models and issues legal opinions to such providers that retain it.
California’s layered regulatory approach creates multiple potential points of exposure for commercial financing providers. The DFPI has examination and enforcement authority over CFL licensees, including the power to conduct periodic examinations, issue orders to cease and desist, impose civil penalties, and seek injunctive relief in court. For willful violations of the CFL, the statute authorizes penalties and even criminal prosecution and liabilities.
For providers subject to the CCFDL but not subject to and licensed under the CFL, the DFPI’s enforcement authority operates through the California Consumer Financial Protection Law (CCFPL), which provides the legal basis for the UDAAP regulations. This means that true non-loan commercial financing providers that are not required to hold CFL licenses, are still subject to DFPI oversight, reporting requirements, and enforcement actions for violations of the CCFDL and the UDAAP standards.
Additionally, the recharacterization risk for MCAs creates a distinct litigation exposure. If an MCA transaction is recharacterized as a loan by a California court, the provider may face claims not only for operating without the required CFL license but also for violating California’s usury laws and potentially for unfair business practices under California Business and Professions Code Section 17200, the state’s Unfair Competition Law. These are serious risks that can result in the voiding of contracts, disgorgement of profits, and significant financial penalties.
Disclaimer: The information on this page is provided for general informational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this content. Every legal matter is unique, and you should consult directly with a qualified attorney regarding your specific circumstances.
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