Factoring Fees in the Firing Line: California Senate Bill 666

California’s Senate Bill 666 (“Bill 666”) recently went into effect on January 1, 2024,[1] and the perhaps-appropriately numbered bill is a development that factors cannot afford to ignore.[2] Bill 666 prohibits various commercial financing providers, including those in the factoring industry, from charging certain types of fees to recipients. California is notorious for its business regulations, and Bill 666 further constrains factors from charging fees that previously have been commonplace in their factoring agreements.

Bill 666 applies to commercial financing transactions of $500,000 or less that are made to “small businesses.”[3] “Small business” is defined as an independently owned or operated business, with its principal office in California, the officers domiciled in California, that has 100 or less employees, and average gross receipts of $15,000,000 or less over the previous three years.[4] This provides some level of clarity regarding which transactions are covered by this Bill, and it is unlikely that those working diligently to ensure compliance will be taken by surprise by a recipient claiming to be a “small business.” Further, for factors who primarily work with only large projects funding more than $500,000, these regulations do not yet affect you (although I suspect the $500,000 amount will be reduced in time). Regardless, this means that factors will need to have multiple templates, those for small businesses and those that are not, and those for transactions over $500,000 and those that are not.

Bill 666 provides for statutory damages between $500 and $2,500 per violation and allows for actual damages and attorneys’ fees for parties damaged by a factor’s failure to abide by Bill 666. Further, there is a clear enhanced risk of class action lawsuits with this bill which could quickly evolve into business-killing litigation. Therefore, it is imperative that factors doing business in California ensure compliance with Bill 666 immediately.[5]

Factors should look closely at the Bill to see if it prohibits any fees that are included in their factoring agreements, including the following:[6]

1.     A fee for monitoring a small business’s collateral, unless the underlying commercial financing transaction is delinquent for more than sixty (60) calendar days.

2.     A fee for filing or terminating a lien filed in accordance with the provisions of the Uniform Commercial Code against the business’s assets that exceeds 150% of the cost of the filing or termination.

3.     A fee for accepting or processing a payment required by the terms of the commercial financing contract as an ACH transfer debit, except for a fee imposed for a payment by an ACH transfer that fails because of insufficient funds in the transferor’s account.

4.     A fee in addition to an origination fee that does not have a clear corresponding service provided for the fee, including, but not limited to, a risk assessment, due diligence, or platform fee.

5.     A fee for providing a small business with documentation that contains a statement of the amount due to satisfy the remaining amount owed, including, but not limited to, interest accrued to the date the statement is prepared and a means of calculating per diem interest accruing thereafter.

Factoring is a vital and legitimate business practice that, unfortunately, has once again been burned by legislators’ zealous efforts to crack down on other unscrupulous businesses practices. It is important that factors funding businesses in California conduct an immediate review of their factoring agreements and keep Bill 666 in mind when formulating new ones.

If you are a factor affected by Bill 666, have questions about what it means for your business, or are seeking to ensure that your factoring agreements are compliant, please contact the experienced factoring attorneys at Eckland & Blando LLP.