Oct 2025

California delivers long-awaited clarity: trade credit is officially out of SB 1286. With Governor Newsom’s signature on AB 1521 this evening (October 1, 2025), California law now defines “trade credit” for the first time ever and makes clear that it is not a “covered commercial debt” under SB 1286.

For the last year, SB 1286 sowed confusion by cramming small-business debt rules into the Rosenthal Fair Debt Collection Practices Act — a statute built for consumer debt. It wasn’t always clear how open-account trade credit fit, especially where personal guarantees were involved.

Now, AB 1521 finally brings clarity: California law expressly recognizes trade credit as its own category, distinct from loans, commercial financing, and debt buying.

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What went sideways with SB 1286 (effective July 1, 2025)

SB 1286 was enacted to protect small-business owners and guarantors from abusive debt collection tactics on certain commercial loans. It extended California’s Rosenthal Fair Debt Collection Practices Act’s consumer-style protections to covered commercial debts of $500,000 or less.

In spirit, the law targeted lenders, commercial financing providers, and debt buyers. But because SB 1286 was wedged into Rosenthal, many wondered if it also swept up material suppliers, distributors, and other businesses extending open-account trade credit. The lack of a definition for “trade credit” meant no one had a clear answer.

The result? Ambiguity, compliance anxiety, and unnecessary costs for businesses whose real business is selling goods and services — not acting as lenders.

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AB 1521 fixes it — and finally defines “trade credit”

AB 1521 amends California Civil Code § 1788.2 to do two significant things:

1. Excludes trade credit from “covered commercial debt.” The statute now says covered commercial debt does not include “(A) Trade credit.”
2. Defines “trade credit” for the first time in California history.

• Credit extended by someone whose primary business is providing goods, materials, equipment, or services; and
• Credit extended in connection with furnishing those goods or services (unless structured as “lease financing” under the Financial Code).

This historic step puts into black-letter law what credit professionals have always known: trade credit is different. It’s not lending in the traditional sense. It’s the backbone of B2B commerce.

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Key dates

• SB 1286: applies to new covered commercial debts or credit entered into, renewed, sold, or assigned on or after July 1, 2025.
• AB 1521: takes effect January 1, 2026, defining trade credit and expressly excluding it from SB 1286.

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What should trade creditors do now through 2025?

The legislative history makes clear: trade credit was never intended to be covered by SB 1286. AB 1521 doesn’t carve out a new special interest — it confirms the Legislature’s original intent.

That gives trade creditors a justifiable position to treat trade credit as outside SB 1286 even during the July 1, 2025 – January 1, 2026 window. Still, each business should consult with counsel and decide its own path.

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Why this is a win for material suppliers and distributors

This is more than a fix. It’s a recognition that trade credit is a unique engine of commerce. By defining the term for the first time, California has taken a historic step in aligning the law with the reality of business. Suppliers and contractors can continue to extend terms confidently, without being trapped in a consumer debt framework never designed for B2B transactions.

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A coalition effort — advocacy in action

AB 1521’s passage was not automatic. It reflects months of hard work by industry stakeholders and advocates who educated lawmakers about the role of trade credit in the economy. Their message was simple: don’t regulate suppliers like payday lenders. Legislators listened.

The result is a clear, durable exemption that gives California businesses certainty and stability.

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We’re here to help — get in touch

Have questions about how AB 1521 applies to your business? Want to review your credit agreements in light of these changes? Reach out — we’ve been on the front lines of this legislative process and are ready to help your business adapt seamlessly.

Bottom line: AB 1521 is a landmark. For the first time in California history, “trade credit” is defined in statute — and it is firmly excluded from SB 1286. That’s clarity worth celebrating.

Fore more information contact

Christopher Ng

cng@gibbsgiden.com

310-374-3367

Christopher Ng is the managing partner of Gibbs Giden. Chris primarily represents companies in a wide range of business, commercial and construction transactions and disputes. Chris is a member of the State Bar of California, Texas, and District of Columbia and licensed to practice in all California state and federal courts.  Chris is also an educator, active speaker, published author and frequent contributor to local, regional and national legal publications. For his achievements, Chris was recently named a “Legal Visionary” by the Los Angeles Times and a “Leader of Influence” by the Los Angeles Business Journal, and has been named a “Rising Star” and “Superlawyer” by Los Angeles Magazine and Super Lawyers® (Thomson/Reuters) regularly since 2009 (including again in 2025).

Chris is nationally recognized in the field of construction law and regularly pens articles and contributes to treatises for construction industry professionals and other lawyers including publications by ENR Engineering News-Record, Wolters Kluwer Law & Business (California Construction Law), BNi® (Acret’s California Mechanics Lien Laws), the California Continuing Education of the Bar (CEB) (California Mechanics Liens and Related Construction Remedies and California Construction Contracts, Defects and Litigation), Business Credit Magazine, and the American Bar Association (ABA) Forum on Construction Law.

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