California debt collection laws: commercial debt collection rules for a business collecting its own invoices

California layers four things on top of your contract: the Rosenthal Fair Debt Collection Practices Act (Civil Code 1788 and following), the Debt Collection Licensing Act (Financial Code 100000 and following), the general civil rules on interest, limitations and fees, and the federal FDCPA and TCPA sitting above all of it.

For a business collecting its own commercial invoices, three of those four barely bite. The FDCPA is limited to debt incurred primarily for personal, family or household purposes and to third party collectors. The Licensing Act is limited to consumer debt. Rosenthal was extended to some commercial debt by SB 1286 but trade credit has since been carved back out. What is left governing you is your contract, the Uniform Commercial Code as adopted in California, the general prohibition on unfair and deceptive practices, and the TCPA when you call or text.

That is a much shorter list than most California business owners expect, and it is why the common instinct to hand everything to an agency at 30 days is usually an expensive reflex rather than a legal necessity. The wider federal and multi state picture is set out on our commercial debt collection laws pillar.

SB 1286 amended the Rosenthal Act to cover "covered commercial debt" of $500,000 or less. The protected obligor is a natural person: someone who personally borrowed for business purposes, or who personally guaranteed a business obligation. An LLC debt with no personal guarantee was never inside it. Critically, it reached first party creditors, not only collection agencies, and it applied to debts entered into, renewed, sold or assigned on or after July 1, 2025. Remedies include private suits, actual damages, attorney fees, and up to $1,000 for a willful violation. Class actions are not available on the commercial side.

AB 1521 did not repeal SB 1286. It narrowed it. Signed on October 1, 2025 and operative January 1, 2026, it amended Civil Code 1788.2 to define trade credit for the first time in California history and to exclude trade credit from covered commercial debt. Trade credit means credit extended by a party whose primary business is supplying goods, materials, equipment or services, extended in connection with furnishing those goods or services, and it expressly excludes lease financing arrangements.

So if you are a distributor, manufacturer, contractor, agency or professional services firm collecting on invoices for what you supplied, you are dealing in trade credit and you sit outside SB 1286. If instead you made a loan to a business that an owner personally guaranteed, you may still be inside it. The distinction is what you extended credit for, not how big your customer is.

Not to collect your own commercial accounts. The Debt Collection Licensing Act requires a license from the Department of Financial Protection and Innovation for persons engaged in the business of debt collection, and Financial Code 100002 defines debt collection as any act or practice in connection with the collection of consumer debt. Consumer debt means money owed by a natural person by reason of a consumer credit transaction, which is a transaction in which a natural person acquires property, services or money on credit primarily for personal, family or household purposes.

An ordinary B2B invoice fails that definition on both limbs: the obligor is usually an entity, and the purpose is commercial. There is no California debt collection license requirement for a business pursuing its own trade receivables.

Two caveats worth knowing. First, the scope of the Act caused genuine confusion when it took effect on January 1, 2022, and some commercial collectors licensed defensively rather than argue the point. Second, the original creditor exclusion for consumer debt is conditional, not absolute: it can fall away where a large share of profits comes from collection fees, or where a large share of receivables is well past due. If any part of your book is consumer debt, that is a question for your attorney rather than an article.

Civil Code 3289 handles this in two subdivisions and it is unusually creditor friendly. Under 3289(a), a rate stipulated in the contract keeps running after a breach, at the same rate, until it is superseded by a verdict or a new obligation. Under 3289(b), if a contract entered into after January 1, 1986 does not stipulate a legal rate of interest, the obligation bears interest at 10 percent per year after a breach. A note secured by a deed of trust on real property is excluded from that subdivision.

Two things follow. A California business with no late fee language in its terms still accrues 10 percent a year from breach, which is better than most states give you by default. And a contract rate, if you set one, survives the breach rather than being replaced by a statutory rate, so the clause is worth writing.

Keep the distinction between interest and a flat late fee in mind. Interest under 3289 is a statutory consequence of breach. A flat late fee is a contract term, and a fee that looks punitive rather than compensatory invites an argument that it is an unenforceable penalty. The mechanics of setting one are covered in our guide to late fees on invoices.

Four years for the ordinary case, and it is worth knowing which four year rule you are relying on.

• Written contract: four years, Code of Civil Procedure 337.
• Open book account: four years, also Code of Civil Procedure 337. This is the running tab a supplier keeps with a regular customer, and pleading it can be simpler than proving each order.
• Sale of goods: four years, Commercial Code 2725, California's enactment of UCC 2-725. It applies whether the contract was written or oral.
• Oral contract: two years, Code of Civil Procedure 339. This is the trap. A handshake services arrangement with no writing and no book account gets half the time.

The clock generally starts when the breach occurs, which for an invoice is the day after payment was due, not the invoice date. A partial payment or a signed written acknowledgment of the debt can restart it. Because the oral contract period is so much shorter, the cheapest protection available to a California business is putting the terms in writing, even a short one page acceptance, so that 337 applies instead of 339. Our guide to the statute of limitations on unpaid invoices works through how the clock behaves across states.

Only if a contract or a statute provides for them, and in California the contract route comes with a condition that catches people out. Civil Code 1717 makes a one sided attorney fee provision reciprocal. If your terms say the customer pays your fees when you enforce the agreement, section 1717 gives the customer the same right against you if they prevail. That reciprocal right cannot be waived by contract.

This is not a reason to leave fees out. A mutual fee clause still changes settlement behavior in your favor, because a customer with a weak reason for non payment now faces your legal costs as well as their own. It is a reason to be honest with yourself about the strength of a claim before you file. Section 1717 applies to actions on a contract, and the reciprocity does not extend to tort claims.

Fees also interact with forum. Small claims does not allow attorney representation in California, so a fee clause has little to do there. It matters in limited and unlimited civil, which is another reason to check the jurisdictional limits before deciding where a claim belongs.

California raised these thresholds with SB 71, signed October 13, 2023 and effective January 1, 2024, and a lot of published guidance still quotes the old numbers.

• Small claims: $12,500 for a natural person, $6,250 where the plaintiff is a business entity. Corporations, LLCs and partnerships get half. Attorneys cannot represent parties.
• Limited civil: up to $35,000, raised from $25,000 by the same bill.
• Unlimited civil: above $35,000.

The entity cap is the detail that trips up California businesses, and you will find plenty of current articles that mention $12,500 without saying it halves for a company. If your LLC is owed $9,000, small claims is closed to you and limited civil is the route. Splitting a single claim into two small claims filings to get under the cap is not a workaround and courts treat it as impermissible claim splitting.

Before any of this, remember that a judgment is not money. Collecting one requires separate enforcement work, and a good share of judgments against businesses are never satisfied. Our note on small claims court for unpaid invoices covers what filing actually involves.

The TCPA does not care whether a debt is consumer or commercial. It governs the call and the text, not the underlying obligation, so autodialed calls and text messages to a mobile number carry TCPA exposure on a B2B account just as they would on a consumer one. Treat mobile numbers with care and get consent recorded in your onboarding paperwork rather than assuming it.

California's Unfair Competition Law, Business and Professions Code 17200, reaches unlawful, unfair or fraudulent business practices generally, and it is not limited to consumer transactions. Misstating what you will do, threatening action you have no intention of taking, or misrepresenting the amount owed remains a bad idea on a commercial account even where Rosenthal does not apply.

The practical standard that keeps a California creditor safe is unglamorous: accurate amounts, your own name, written records, a predictable schedule, and no threats you are not prepared to carry out. That standard is compliant in every state, which matters if you sell across state lines, because collection conduct is generally judged by the law of the debtor's state.

For ordinary trade credit, no, not since AB 1521 became operative on January 1, 2026. Before SB 1286, the Rosenthal Act was a consumer statute and commercial accounts sat outside it. SB 1286 pulled certain commercial debt in from July 1, 2025. AB 1521 then pushed trade credit back out.

Where Rosenthal can still reach a commercial account is the narrower case SB 1286 was actually aimed at: small business financing where a natural person is on the hook, such as a business loan or line of credit personally guaranteed by an owner, of $500,000 or less, entered into or renewed on or after July 1, 2025, and not extended by a supplier in connection with furnishing goods or services. Lenders and finance companies should read that carefully. A distributor chasing a past due invoice generally does not need to.

If any of your customers are sole proprietors buying for mixed personal and business use, the line gets less comfortable, and the sensible answer is to hold your whole process to the stricter consumer standard rather than sort accounts one at a time. The difference between the two regimes is set out in our explainer on first party versus third party debt collection.

The legal conclusion is permissive, and the operational conclusion follows from it. A California supplier can run a firm, documented, scheduled collections process in its own name, charging 10 percent after breach even without a contract rate, without a DFPI license, without Rosenthal exposure on trade credit, and with four years to file. Almost nothing about California law explains why so many invoices go unchased until they are 120 days old.

What actually explains it is capacity. The person who would send the day 3, day 15 and day 30 messages has a day job, and the reminders go out when someone remembers. Handing the file to an agency at 25 to 50 percent of what it recovers solves the capacity problem by paying a large share of the balance for it, and it also hands over the customer relationship at the exact moment it is most fragile.

The alternative is to make the sequence run by itself while you remain the creditor of record. That is the legal position this page describes, and it is the one that keeps both the relationship and the margin. Our page on the collection agency alternative for small business works through the economics.