Unlicensed Means Unenforceable: What California’s New Law Lets You Quote Back at a Funder (2026)

Most consumer-protection rules tell you what to look for. California's new commercial financing law goes further: starting January 1, 2028, it tells an unlicensed funder that their agreement with you isn't enforceable. That's not shopping advice — that's contract law. And it changes the conversation you can have with any MCA funder operating in California.

This is a companion to our breakdown of AB 2116's licensing requirements. That post covers what the law demands of brokers and funders. This post covers what the law gives you: the exact unenforceability provision, how to quote it back at a funder, and — just as important — what it does not do.

The provision, in plain English

AB 2116 added Chapter 3.1 to the California Financing Law (Financial Code §§ 22655–22662). The enforcement provision works like this: beginning January 1, 2028, a commercial financing agreement is unenforceable unless the provider (1) holds a California license, (2) has submitted a complete application and is awaiting the Department of Financial Protection and Innovation's approval or denial, or (3) entered into the transaction before January 1, 2028.

Three details define the boundaries:

• It covers "Covered Financing": commercial financing of $500,000 or less to small businesses (generally, for-profit entities with annual gross receipts of $16 million or less, adjusted every two years). Revenue-based financing, factoring, asset-based transactions, commercial loans, open-end plans, and lease financing are all in. It does not apply generally to other loan transactions under the California Financing Law — it's a commercial-financing provision.
• It has a real start date: January 1, 2028. Agreements entered before that date are carved out — the provision is not retroactive.
• There's a six-month gray zone: the licensing requirement itself doesn't take effect until July 1, 2028, but the unenforceability provision goes live January 1, 2028. That gap is a known drafting issue — funders and lawyers alike are watching whether the legislature cleans it up — which is exactly why a pending complete application counts as a safe harbor: it keeps agreements enforceable through the transition.

The quote-back playbook

You don't need to litigate to use this. The provision's power is in the shopping conversation — it gives you questions an unlicensed funder can't answer well. Use them in writing (email counts):

1. "Are you licensed under the California Financing Law for commercial financing?" After January 1, 2028, the answer has to be yes or "application pending." A funder who dodges the question is telling you the answer.
2. "Can you send me your license number — or your DFPI application confirmation?" Licensed providers can produce this; a pending applicant has a submission trail. Silence is information.
3. "Who is the actual provider on the agreement?" The provision binds the provider, not the broker. If the broker won't name the funder on the contract, you can't verify the funder's status — and that's the whole point of the question.
4. "Was this agreement entered before January 1, 2028?" Pre-2028 agreements are carved out of the provision. If you're renewing or refinancing into a new agreement after that date, the new agreement is what's tested.

Then do the thing the provision was designed to make normal: walk away from anyone who won't answer in writing. A funder with a license or a pending application has every reason to prove it. A funder who won't is asking you to sign an agreement they may not be able to enforce — which is the borrower's leverage, stated plainly.

What this provision does NOT do

Honest limits, because the leverage only works if you understand the edges:

• Nothing changes before January 1, 2028. Until the provision is operative, quoting it at a funder is quoting a future law. Use the time to learn which of your funders is licensing up — not to bluff.
• It doesn't cap rates. The same bill extends the CFL's exemption from California's 10% constitutional usury cap to license holders — licensed doesn't mean cheap. Compare every offer in total dollars, as always (see how much an MCA actually costs).
• It doesn't apply to every deal. Transactions over $500,000, recipients above the small-business threshold, and transactions entered before January 1, 2028 sit outside it. If your deal doesn't fit, other protections — like California's ban on pre-default confessions of judgment (effective January 1, 2028) and the broker APR-posting rules (2028) — still matter.
• "Unenforceable" is not "void on your say-so." Whether and how a court applies the provision in a live dispute is for a lawyer, not a blog post. The shopping leverage is real today; the litigation outcome would depend on the facts. This post is information, not legal advice.

How this fits the bigger regulatory arc

California isn't acting alone. Vermont's H.B. 648 makes knowing and willful violations of its MCA rules void the contract entirely (the funder collects nothing) — we covered the full leverage playbook in the Vermont and California rules post. The pattern across states is unmistakable: regulators are moving from disclosure (tell the borrower the cost) to consequence (lose the deal if you don't comply). The borrowers who benefit are the ones who know the rules exist — which is why the quote-back habit starts now, not in 2028.

What to do this week

• If you have active MCA or revenue-based agreements in California, ask each provider now whether they plan to be licensed — the six-month application runway means the serious ones are filing soon.
• If you're shopping new funding, add the license question to your funder vetting checklist today. The funders who answer it well in 2026 are the ones who'll still be standing in 2028.
• If a provider pressures you to sign without naming the funder or showing licensing status, that's the entire red-flag list in one behavior. Slow down or walk.

Frequently asked questions

Can I use this provision to get out of an existing MCA agreement?

No. The provision applies to agreements entered on or after January 1, 2028 — deals signed before that date are carved out. It also isn't self-executing "void on your say-so" language; how a court applies it in a dispute depends on the facts and is a question for an attorney.

Does "unenforceable" mean the funder can't collect anything?

The statute makes covered agreements unenforceable without a license or pending complete application — but the practical effect in any specific dispute would be decided by a court. Don't stop paying on the theory of a blog post; use the provision as shopping leverage and talk to a lawyer before treating it as a defense.

What if the provider applied for a license but hasn't received it?

A complete application pending with the DFPI is an express safe harbor — the agreement stays enforceable while the application is awaiting approval or denial. Ask for the application confirmation in writing; it's a normal request and legitimate applicants can produce it.

Does this apply to my deal if my business is outside California?

The provision targets covered financing transactions in California. If your business is elsewhere, your state's rules apply — Vermont's H.B. 648 has its own void-contract teeth for knowing violations. The general lesson travels: always ask who the funder is and whether they're licensed where you operate.

Is a licensed funder automatically a good deal?

No. Licensing is a floor, not a ceiling — and California extended its usury-cap exemption to license holders, so licensed funders can still price expensively. License status tells you the funder is accountable; total dollars repaid tells you whether the deal is good. Check both.