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Default Rate Impact Calculator

Model how merchant default rates affect portfolio yield, losses, and net returns.

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How Do Defaults Impact MCA Portfolio Returns?

Default rate is the percentage of funded deals where the merchant fails to complete repayment. In MCA, defaults reduce portfolio returns because the funder (and any syndication participants) absorb the loss on the uncollected portion of RTR. However, defaults are not total losses -- partial collections before default and post-default recovery (UCC enforcement, settlement, COJ) recover 20-40% of the defaulted amount on average. The net loss rate (default rate minus recovery) is the true drag on returns. For a portfolio with a 10% default rate and 30% recovery, the net loss rate is 7% -- meaning the portfolio must generate at least 7% gross yield just to break even. Run the numbers from gross defaults through recovery to see your actual net loss rate and what is left over as real yield.

How to Use This Calculator

Enter your portfolio metrics

Total funded amount and average deal size determine the number of deals and concentration. Larger portfolios with smaller average deals have more diversification and more predictable default rates.

Set your default and recovery assumptions

Use actual data if available. Industry averages: A-paper 3-5% defaults, B-paper 7-10%, C-paper 12-18%, D-paper 20-30%. Recovery averages 25-40% depending on enforcement methods and merchant asset quality.

Review the net impact on yield

The calculator shows how defaults erode gross portfolio yield to net yield. If your net yield is below your cost of capital, the portfolio is losing money despite appearing profitable at the gross level.

Key Concepts

Gross Default Rate

Percentage of funded deals that stop paying before RTR is fully collected. Measured by funded amount, not deal count (a $200K default has more impact than a $20K default).

Recovery Rate

Percentage of defaulted amounts eventually recovered through collections, UCC enforcement, settlements, or COJ judgments. Higher recovery rates reduce the net loss impact.

Net Loss Rate

The actual permanent loss as a percentage of the portfolio. Net loss = default rate x (1 - recovery rate). This is the number that matters for portfolio economics.

Expert Insights

Default Rates Are Not Random: Defaults cluster around specific factors: merchants funded within the first 6 months of business default at 2-3x the rate of established merchants. Stacked positions default at 2x the rate of first positions. Certain industries (trucking, construction) have structurally higher default rates. Know these patterns and price accordingly -- that is the difference between a profitable portfolio and one that bleeds.

The Recovery Illusion: A 30% recovery rate sounds reasonable, but recovery takes time -- often 6-18 months of collections, legal fees, and negotiation. The time value of that delayed recovery significantly reduces its present value. A dollar recovered 12 months later is worth less than a dollar collected on time. Factor recovery time into your true net loss calculation.

Frequently Asked Questions

Industry-wide, the average MCA default rate is approximately 10-15%. Well-underwritten A/B-paper portfolios run 5-8%. C/D-paper portfolios run 15-25%. These are lifetime default rates (percentage of funded deals that ever default), not annual rates.

Indirectly but significantly. Defaults trigger clawbacks, reducing net commission income. High default rates also damage your reputation with funders, leading to reduced buy rates, lower approval rates, and potential relationship termination. Maintaining a default rate below the funder's portfolio average is essential for long-term broker success.

Yes. Better underwriting (verifying deposits, checking UCC history, assessing cash flow sustainability) reduces defaults by 30-50%. Avoiding excessive stacking, right-sizing deals (not over-funding), and monitoring merchant health post-funding are the key levers. Prevention is exponentially more cost-effective than recovery.

Results are estimates for educational purposes only. Actual amounts may vary based on your specific financial situation, market conditions, and other factors. This calculator does not constitute financial advice.