California just banned the 'factor rate' pitch. Here's what SB 362 actually changed

The short version

If you’ve gotten a call or email pitching fast business funding at “1.2% a month” or some other small-sounding number, California now has a law aimed directly at that pitch. SB 362 took effect January 1, 2026, and it bans commercial financing providers, including merchant cash advance (MCA) companies, from using the word “rate” or “interest” in any way that’s likely to mislead a borrower about the real cost of the money. It applies to financing offers of $500,000 or less, which covers the vast majority of small business deals.

The law doesn’t ban MCAs. It just makes it harder for a provider to quote a number that sounds small while hiding a cost that’s actually very large.

What was happening before this law

Merchant cash advances aren’t loans in the traditional sense. They’re an advance against future sales, repaid through a fixed percentage of daily card transactions or a fixed daily debit. Providers have historically quoted the cost using a “factor rate,” something like 1.2 or 1.4, applied to the amount advanced. A $50,000 advance at a 1.3 factor rate means you repay $65,000.

That sounds like a 30% cost. In practice, because MCAs are typically repaid over a few months rather than a year, the annualized cost, the true APR, is often triple digits once you account for the real repayment period. A factor rate of 1.3 repaid over four months can work out to an APR well above 100%. Quoting “1.3” instead of the APR made offers look dramatically cheaper than they were, and plenty of merchants signed without ever seeing the annualized number.

A worked example, so the numbers are concrete

Say you’re offered $40,000 against future card sales, with a 1.35 factor rate, repaid daily over an estimated 4 months through a fixed percentage of your daily card batch.

• “1.35 factor rate” means you repay $54,000 total ($40,000 x 1.35)
• A repayment period of about 4 months means that $14,000 in cost lands over roughly 120 days
• The daily holdback is a fixed amount or percentage pulled from your card batch every business day, regardless of how sales are trending
• Annualize that $14,000 cost over 120 days instead of a full year and you get roughly 107% APR

That 107% figure is the number a factor-rate pitch is designed not to show you. It’s also exactly the number SB 362 now requires the provider to disclose once they’ve made you a specific offer.

What SB 362 actually requires

The law amends California’s existing commercial financing disclosure rules. The core change: once a provider extends a specific financing offer, any time they quote a price, fee, or financing amount, they also have to state the APR. Providers can’t use “rate” or “interest” in a way that’s likely to deceive the recipient about the real cost, and “factor rate” language is effectively off the table in sales communications for the funding types this law targets.

Violations are treated as either a California Financing Law violation, for providers licensed under that law, or an unfair, deceptive, or abusive practice under the state’s consumer financial protection law. Both give the Department of Financial Protection and Innovation grounds to investigate and act.

How a pitch might still skirt the rule

The law targets deceptive use of the terms, not every form of creative marketing. Watch for pitches that quote a factor rate or “cost of capital” number without ever stating an APR, even after you ask directly. Watch for a new label, like “program fee” or “funding fee percentage,” used instead of “rate,” while still implying it’s comparable to a loan’s interest rate. Watch for a provider that gives you a total repayment amount and a factor rate but dodges the question when you ask what that works out to annually. And watch for pressure to sign before you’ve had a chance to do the math yourself.

None of these automatically mean fraud. But a provider that gets evasive about the APR, after this law specifically requires it be disclosed, is telling you something.

Questions to ask before signing any MCA or financing offer

1. What is the APR, stated as a percentage, not just a factor rate or program fee?
2. What is the total dollar amount I’ll repay, and over what actual time period?
3. Is repayment a fixed daily amount or a percentage of sales? If sales drop, does my payment drop too, or is it still fixed?
4. Are there additional fees, origination, administrative, or otherwise, on top of the factor rate?
5. What happens if I need to pay this off early? Some MCA structures don’t reduce the cost at all for early payoff.

If a sales rep can’t or won’t answer the APR question with a number, that’s reason enough to walk away and look at other options, including a line of credit from a bank or credit union, or invoicing tied to your existing processing relationship.

This is general information about a recent law, not legal advice. If you’re evaluating a specific financing offer, talk to an attorney or your accountant before signing anything.

Sources: Buchalter client alert on SB 362, LegiScan bill text for SB 362, Cobalt Intelligence summary of SB 362.