What Is the Maximum Interest Rate on a Business Loan in California?

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

California's Constitution caps the interest a private, non-exempt lender may charge on a business loan. The cap is the higher of 10 percent a year or 5 percent plus the Federal Reserve Bank of San Francisco's discount rate. An 18 percent private loan is usually over that limit. If a loan is usurious, the lender forfeits the agreed interest, and the borrower may be able to recover interest already paid. Kolmogorov Law, P.C. handles these disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss the rate on a loan you made, a loan you took, or a late charge on your invoices.

The constitutional limit for lenders with no exemption

If the parties have no written agreement on a rate, interest on a loan is 7 percent a year. By written contract they may agree to more, within two ceilings.

For a loan used primarily for personal, family, or household purposes, and not mainly to buy, build, or improve real property, the ceiling is 10 percent a year. For any other loan, which includes most business loans, it is the higher of 10 percent or 5 percent plus the rate the Federal Reserve Bank of San Francisco charges member banks on advances, commonly called the discount rate. The rate is fixed as of the 25th day of the month before the earlier of the contract date or the funding date. (Cal. Const., art. XV, § 1.)

For 18 percent to be lawful under the formula, the discount rate would need to be at least 13 percent. Unless it is, an 18 percent business loan from a friend, an investor, or another company is lawful only if an exemption applies.

Who is exempt

The exemptions are wide. The Constitution itself excludes banks, credit unions, industrial loan companies, licensed pawnbrokers and personal property brokers, and loans made or arranged by a licensed real estate broker and secured by real property. It also excludes any other class of persons the Legislature authorizes by statute. (Cal. Const., art. XV, § 1.)

One statutory exemption matters in private business lending. Debt issued by an entity is exempt when the loan, or a bona fide written commitment or credit line, is at least $300,000, with a discounted note counted at its purchase price. So is debt of an entity with total assets of at least $2,000,000 on qualifying financial statements dated within 90 days before the loan. The lender and borrower must also have a preexisting personal or business relationship, or enough business and financial experience to protect their own interests. (Corp. Code, § 25118, subds. (a), (b), (f).)

The exemption does not cover debt issued by an individual or by a partnership with an individual general partner, and it does not apply where an individual's guaranty is part of the consideration for the loan. (Corp. Code, § 25118, subd. (e).)

So the same 18 percent loan can be lawful from one lender and usurious from another.

What counts as interest, and what counts as a loan

The Constitution forbids a lender to collect more than the permitted interest by charging any fee, bonus, commission, discount, or other compensation. (Cal. Const., art. XV, § 1.) Points, origination fees, and an "exit fee" may all be counted when a court computes the true rate.

The limit applies only to a loan or a forbearance. The California Supreme Court defines a loan as the delivery of money under a contract to return an equivalent amount later, and a forbearance as giving further time to pay a debt or agreeing not to enforce it when due. Courts look to substance over form. (Southwest Concrete Products v. Gosh Construction Corp. (1990) 51 Cal.3d 701, 705.)

That is why a sale on credit, a lease, or a true purchase of receivables is analyzed differently from a loan. Our page on merchant cash advance lawsuits discusses how that argument plays out.

What happens when a loan is usurious

The consequences fall on the lender. The creditor is entitled to repayment of the principal without the agreed interest, and interest already paid at the usurious rate is credited against principal in a suit on the note. (Hardwick v. Wilcox (2017) 11 Cal.App.5th 975, 978-979.)

A borrower's claim to recover usurious interest carries a two-year limitations period, and a borrower who sues within one year may seek treble the interest paid. (Id. at p. 991 & fn. 3.) Paying the interest voluntarily does not waive the protection. (Id. at pp. 988-989.)

Usury does not cancel the debt. The borrower still owes the principal, and may owe legal-rate interest as damages after the note matures. The procedure for suing on the note is covered on our promissory note page.

Interest on late invoices is a different question

In Southwest Concrete, a supplier's invoices carried a charge of 1.5 percent a month on unpaid balances. The Supreme Court held it was not subject to the usury law, because a late charge on a credit sale is not payment for a loan or forbearance. (Southwest Concrete, supra, 51 Cal.3d at p. 709.)

Two cautions. First, the result can change if you agree to extend the due date in exchange for interest, since giving more time to pay is what a forbearance is. Second, the court did not decide whether the charge was a valid liquidated damages clause. A late fee in a business contract is valid unless the party challenging it shows it was unreasonable when the contract was made. (Civ. Code, § 1671, subd. (b).) Our liquidated damages page explains that test, and the prejudgment interest page covers the rate when the contract is silent.

Put the late charge in the signed terms where you can. Whether an invoice term became part of the contract is often the first fight when a business tries to collect unpaid invoices with interest.

If you are the lender

A lender met with a usury claim, or a usury defense to its own suit on the note, usually stands on an exemption. Whether it holds depends on facts fixed when the loan was made: who the lender was, who arranged the loan, the borrower's form and assets, and any individual guaranty. Fees are examined along with the stated rate. If the exemption fails, the exposure is the loss of the agreed interest, a credit for interest already paid, and possibly a claim to recover it. I review those facts before filing suit on a note.

If you are the borrower

Usury is a defense and a claim, not a way out of the principal. Gather the note, the closing statement showing fees, and proof of every payment. Then find out who the lender really is, because a license or a broker's involvement can change the answer.

What to bring to the first meeting

The promissory note and any amendments or extensions.
The closing or funding statement showing fees and deductions.
A payment history.
Anything showing the lender's license or a broker's role.
For invoice disputes, the signed terms and a sample invoice.

Frequently asked questions

Is 18 percent interest on a private business loan legal in California, and what happens if it is not?

Usually it is not, unless the lender is exempt. The California Constitution limits a non-exempt lender to the higher of 10 percent a year or 5 percent plus a Federal Reserve discount rate on a business loan. If the loan is usurious, the lender loses the agreed interest, and the borrower may sue to recover interest paid.

What is the maximum interest rate on a business loan in California?

There is no single number. Banks and other exempt lenders are not bound by the constitutional cap. A non-exempt lender making a loan for business purposes may charge the higher of 10 percent a year or 5 percent plus the Federal Reserve Bank of San Francisco discount rate, measured shortly before the loan is made.

Can I charge interest on late invoices in California?

Generally yes, if the customer agreed to it. The California Supreme Court has held that a late charge on an overdue commercial account for goods sold on credit is not a loan or forbearance and so is not subject to the usury limit. The charge can still be challenged as an unreasonable liquidated damages provision.

Are loans over $300,000 exempt from California usury law?

Often, but not automatically. Corporations Code section 25118 exempts qualifying debt of at least $300,000 issued by an entity, if the parties have a preexisting relationship or enough financial experience to protect themselves. It does not apply to loans to individuals or where an individual's guaranty is part of the consideration.

I already paid two years of interest on a loan I now think was usurious. Can I get that money back?

Possibly. In California a borrower may sue to recover usurious interest, and paying it voluntarily is not a waiver. The claim has a two-year limitations period, and a borrower who sues within one year may seek treble the interest paid. Whether the lender was exempt is the first question to answer.

Talk to a California breach of contract attorney

If you need to know whether a rate is lawful, or you are in a dispute over a loan, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents lenders and borrowers in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the loan documents, the lender's status, and the court.