In a victory for creditors, California clarifies confusion created by previous collections law 

California Governor Gavin Newsom signed AB 1521 on October 1, formally defining “trade credit” in state law for the first time and clarifying SB 1286, a bill signed last year that created confusion when it offered small businesses consumer debt protections as it expanded on the Rosenthal Fair Debt Collection Practices Act.  

Why it matters: SB 1286, in an effort to protect consumers from predatory debt collectors, created a headache for those with debtors in California who found that small-businesses shouldering up to $500,000 in commercial debt were offered consumer-style protections.  

SB 1286’s definition of a “covered commercial credit transaction” created confusion for creditors across the state. “On its face, that language could describe any sale of goods or services on terms—the very essence of trade credit,” said Chris Ng, managing partner at Gibbs Giden Locher Turner Senet and Wittbrodt LLP (Westlake Village, CA). “That overlap led many suppliers to wonder whether they had inadvertently become ‘commercial financing providers’ subject to the same consumer-style restrictions that apply to lenders and debt buyers.” 

By clarifying that trade credit is not a covered commercial debt, AB 1521 restores alignment between the legal definitions of selling and lending and the reality. The clarification will eliminate uncertainty amid credit and collections teams, reduce the risk of opportunistic litigation from those taking advantage of the misclassification and preserve access to open-account terms that are critical to keeping supply chains flowing. “Trade creditors can once again rely on the clear understanding that extending terms for goods, materials, equipment or services is part of selling—not lending,” Ng said.  

AB 1521 takes effect on January 1, 2026, leaving a six-month window where certain counterparties may still argue that SB 1286, which took effect on July 1, still applies, but they will surely face an uphill battle.  

“The legislative history is clear—trade credit was never intended to be included,” Ng said. “Businesses therefore have a justifiable position that they fall outside SB 1286’s reach even before AB 1521’s effective date. Each company should document its practices and consult counsel on its preferred compliance approach.” 

Aside from clearing up the confusion around SB 1286, the historic bill is the first time California law has officially recognized trade credit as a distinct form of commercial credit, which will have sweeping benefits outside of the SB 1286 confusion. By formally defining trade credit in California law, there will now be a formal definition to help as courts, regulators and legislators deliberate on future policymaking.  

“The formal definition helps policy alignment, as it affirms that trade credit is an extension of a sale not a financial product,” Ng said. “It also creates more clarity with contracts, as businesses can draft credit applications, guarantees and internal policies that track the statute, reducing ambiguity in future disputes.” 

The signing of AB 1521 reflects the efforts of the business credit community, as creditors lobbied for more clarity in the extended Rosenthal Act. The effort from the credit community secured the landmark bill, not only clarifying SB 1286 but strengthening the foundation for fair business-to-business commerce moving forward. 

“Special recognition is due to the team at The Home Depot, whose leadership, advocacy and coordination were instrumental in advancing this legislation on behalf of businesses nationwide that extend trade credit within California,” Ng said. “Their efforts exemplify what effective, business-led collaboration can achieve. Credit is also due to Taylor Jennings, Esq. and the attorneys at Gibbs Giden LLP, outside counsel to The Home Depot in California, for their work in drafting the statutory language that ultimately became the definition of ‘trade credit’ within AB 1521.”