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Risk-Adjusted Return Calculator

Calculate expected return on MCA deals adjusted for default probability and recovery rates.

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What Is Risk-Adjusted Return?

Risk-adjusted return accounts for the probability that a deal will default and the expected recovery if it does. A $100K deal at 1.30 factor has a gross return of $30K (30%). But if there is a 10% chance of default with 30% recovery, the expected loss is $7,000 (10% x $100K funded x 70% loss-given-default). The risk-adjusted return is $30K - $7K = $23K (23% yield). This is a more honest projection than the factor rate alone because it prices in the reality that not every deal will repay in full. For syndicators, underwriters, and sophisticated ISOs, risk-adjusted return is the standard metric for evaluating deals and comparing risk/reward across different merchant profiles.

How to Use This Calculator

Enter deal terms

Funded amount and factor rate determine the gross return. This is the maximum you will earn if the deal performs perfectly.

Estimate default risk

Default probability should reflect the specific merchant profile. A-paper first position: 3-5%. B-paper: 7-10%. C-paper stacked: 15-25%. Use your portfolio data for accuracy.

Set recovery assumptions

Recovery rate on defaults varies by enforcement method and merchant assets. Conservative: 20-25%. Moderate: 30-40%. Optimistic: 40-50%. Use 25-30% for planning purposes.

Key Concepts

Expected Loss

Default probability x funded amount x (1 - recovery rate). The statistical loss you should expect on any given deal. Across a portfolio, actual losses should approximate expected losses if your probability estimates are accurate.

Loss-Given-Default (LGD)

The percentage of funded amount lost when a default occurs, after recovery. LGD = 1 - recovery rate. If recovery is 30%, LGD is 70%.

Risk Premium

The additional return demanded for taking on higher risk. A C-paper deal should offer higher risk-adjusted returns than an A-paper deal to compensate for the higher default probability.

Expert Insights

Not All High-Factor Deals Are Good Deals: A C-paper deal at 1.45 factor looks more profitable than an A-paper deal at 1.20. But after adjusting for default risk: A-paper at 1.20 with 3% default probability has a risk-adjusted yield of approximately 18%. C-paper at 1.45 with 20% default probability has a risk-adjusted yield of approximately 17%. The apparently more profitable deal is actually less profitable on a risk-adjusted basis. Always run the risk-adjusted numbers.

Portfolio Theory Applies: A portfolio of 50 B-paper deals produces more predictable risk-adjusted returns than a portfolio of 10 C-paper deals, even if the C-paper portfolio has higher theoretical yield. Diversification reduces the variance of actual outcomes around expected outcomes. The Law of Large Numbers is your friend in MCA -- more deals at moderate risk beats fewer deals at high risk.

Frequently Asked Questions

Use your historical data segmented by merchant profile. Track default rates by industry, credit score band, time in business, position number, and deal size. Over 50+ deals per segment, patterns stabilize. If you lack data, use industry benchmarks: first position A/B paper 5-8%, stacked C/D paper 15-25%.

Yes. Factor rate tells you the maximum return. Risk-adjusted return tells you the expected return after accounting for real-world defaults. Every experienced funder, syndicator, and sophisticated ISO uses risk-adjusted metrics. Factor rate is marketing; risk-adjusted return is finance.

Two paths: reduce default probability (better underwriting, pre-qualification, avoiding excessive stacking) or improve recovery rates (stronger UCC enforcement, faster collection processes, better documentation). Reducing default probability has the bigger impact because prevention is always cheaper 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.