What Is a Confession of Judgment? California AB 2116 Sets 2028 Ban on Pre-Default Clauses

Read the default remedies section of any commercial financing contract you are offered this month before you sign, and ask the provider or broker to point out any pre-default confession of judgment or power of attorney language. If you are asking what is a confession of judgment, it is a contract provision where a business agrees in advance to let a financing provider obtain a court judgment without a standard lawsuit or trial if an alleged default occurs. While California signed Assembly Bill 2116 (Chapter 823) on September 30, 2026 to ban these pre-default clauses in covered small-business financing, those protections do not become operative until January 1, 2028. Until that date arrives, reviewing the fine print yourself remains your primary defense.

What Is a Confession of Judgment in Small-Business Financing?

On September 30, 2026, the Governor of California announced the signing of AB 2116, describing the protection of small businesses from abusive financial practices as one purpose of the legislation. According to the chaptered text of AB 2116 (Chapter 823) as reproduced on LegiScan, the law was approved and filed with the Secretary of State on that same day.

Once the commercial-financing chapter becomes operative in 2028, covered providers and brokers are prohibited from:

• Taking a confession of judgment clause before a default occurs.
• Taking a power of attorney from a recipient before default.
• Including a contract restriction that blocks a recipient from disclosing information gained through its business with the provider.

Blocking gag clauses matters when you are comparing financing options. A growing number of states (such as CA, NY, UT, and VA) already require commercial financing cost disclosures, including estimated APR, from providers and in some states brokers. Under AB 2116, a commercial-financing broker will also be required to display on its website the average and maximum APRs for transactions it facilitated in the preceding calendar year, and provider reporting begins in 2029. The LegiScan reproduction of the chaptered text does not specify the exact calendar date when the broker website display must first appear or the regulator’s rulemaking schedule.

Which Small Businesses and Financing Offers Are Covered?

The rules in AB 2116 do not apply to every business transaction. According to the chaptered text as reproduced on LegiScan, a covered “recipient” is a small business or small-business owner presented with a specific commercial-financing offer of $500,000 or less. The statute defines a “small business” as having annual gross receipts of no more than $16 million, or a higher, biennially adjusted state threshold.

The law’s definition of “commercial financing” covers:

• Accounts-receivable purchase transactions, including factoring (which is a sale of invoices at a discount, where fees and advance rates vary).
• Commercial loans and commercial open-end credit plans.
• Asset-based lending transactions.
• Lease financing.

While the statutory summary refers to “accounts-receivable purchase transactions, including factoring,” small-business owners should note that a merchant cash advance (MCA) is structured as a purchase of future receivables rather than a loan, using a purchase price, factor rate, holdback, and remittance schedule. No single financing product suits every business or situation.

Coverage is also subject to statutory exemptions. Real-property-secured transactions and certain providers with infrequent California transactions are exempt under the chapter.

When Do California’s Confession of Judgment Rules Begin?

If you are reviewing a California confession of judgment agreement today, the timeline in the chaptered text on LegiScan has two distinct 2028 dates:

1. January 1, 2028: The commercial-financing chapter of AB 2116 becomes operative.
2. July 1, 2028: The prohibition on operating as a commercial-financing provider or broker without a license becomes operative, with an exception for an applicant that has submitted a complete application by July 1, 2028 while a decision on that application is pending.

Under the chapter, a covered commercial-financing agreement is unenforceable unless the provider is licensed, has a complete application pending under that provision, or the transaction was entered into before January 1, 2028. How the January 1, 2028 transaction date in the unenforceability provision interacts with the July 1, 2028 licensing date is not yet resolved by regulator guidance.

What This Means for Owners With Damaged Credit

When you are working to rebuild damaged business or personal credit, financing offers often come with tighter remedies and stricter security clauses. A pre-default confession of judgment or power of attorney can allow a provider to pursue a court judgment or control account actions quickly if your cash flow dips and you miss a remittance or payment—creating public records or bank disruptions that set your credit recovery back further.

Because AB 2116 does not take effect until 2028, take three steps this month if you are shopping for working capital:

• Search the PDF before signing: Look for the phrases “confession of judgment” and “power of attorney” in every financing agreement or addendum.
• Verify the timing of remedies: Check whether any power of attorney or judgment remedy is triggered upon signing (pre-default) rather than after a verified default.
• Compare disclosed costs: Review the state-required cost disclosures—including any provider’s or broker’s disclosed estimated APR—and feel free to share contract terms with an attorney or advisor before committing.

Sources

• Governor of California — Governor Newsom signs historic law to stop big business from shutting out competition, cuts red tape to speed up business permitting (2026-09-30)
• LegiScan — California AB 2116, Chapter 823 (2026-09-30)