Portfolio default rate by tier is the underwriting fact that explains MCA pricing structure: funders charge more on lower-tier paper because more of those deals default and the funder must recover the losses through factor margin on the survivors. Updated for 2026.
Default rate by paper grade (2026 industry data).
- A-paper: 6–10% annual default rate.
- B-paper: 10–15% annual default rate.
- C-paper: 13–18% annual default rate.
- D-paper: 15–25% annual default rate.
- E-paper: 25–40% annual default rate.
These figures represent annualized portfolio default rate, measured as deals entering default status (≥30 days without ACH collection) per year as percentage of active portfolio.
Definition of "default" in MCA context.
Default in MCA portfolios is typically measured at one of three thresholds:
- First default: 1+ NSF or bounced ACH within 30 days of expected collection.
- Material default: 30+ days of zero collection.
- Charge-off: 90+ days without collection, file moved to recovery/legal.
The default rates cited above use definition (2) — material default. Charge-off rates are typically 60–80% of material default rates because some default scenarios cure through workouts or refinancing.
Why default rates vary by tier.
A-paper merchants (12+ months operating, $25K+/mo revenue, 650+ credit, no NSFs) have characteristics correlated with business durability. The same characteristics that produce strong credit also produce ability to sustain ACH debits through cash-flow stress.
E-paper merchants have characteristics correlated with cash-flow fragility — short tenure, low revenue, weak credit, frequent NSFs. The MCA debit itself often accelerates the cash-flow crisis it was meant to solve.
Default cost economics.
A 9-month MCA at 1.30 factor generates $30 of factor revenue per $100 deployed. Out of that $30:
- Cost of capital (7–10% AUM): $5–$7
- Operating cost (servicing, underwriting): $4–$6
- Bad debt provision: $8–$14 (varies by tier)
- Net margin: $5–$15
For A-paper at 8% default with 25% recovery rate: - Bad debt = $8 × (1 − 0.25) = $6 per $100. Profitable.
For E-paper at 35% default with 15% recovery: - Bad debt = $35 × (1 − 0.15) = $30 per $100. Unprofitable at 1.30 factor.
To make E-paper profitable, factor must rise to 1.65+: - Factor revenue = $65 per $100. - Bad debt = $30 per $100. - Net = $20–$25 per $100 after costs.
This is the math behind 1.55–1.80 factor rates on E-paper.
Industry default rate variation.
Default rates vary significantly by industry:
- Trucking: 18–25% across all tiers. Fuel cost volatility, FMCSA cancellation risk.
- Restaurant: 12–18% across all tiers. High failure rate generally, COVID-era distortion still present.
- Retail: 10–15% across all tiers. Seasonal cash flow.
- Construction: 15–22% across all tiers. Project completion risk, weather seasonality.
- Professional services: 6–10% across all tiers. Stable cash flow.
- Healthcare: 5–8% across all tiers. Strong cash flow, low failure rate.
- Auto repair: 10–14% across all tiers.
- Manufacturing: 8–12% across all tiers.
This is why factor rates also vary by industry — a 650 FICO restaurant gets a higher factor than a 650 FICO professional services firm.
Geographic default rate variation.
- California: Slightly above national average (1–2 points higher) due to regulatory friction and high cost of operation.
- New York: Slightly above national average (1–2 points higher) due to similar factors and COJ ban impact on recovery.
- Texas: Slightly below national average due to favorable business environment.
- Florida: At national average; high concentration of MCA volume.
- Rust Belt states (OH, MI, PA): Above national average (2–4 points higher) due to industrial transition.
Default rate trends 2024–2026.
Industry default rates have risen modestly across all tiers:
- A-paper: 6% (2022) → 8% (2026). Driven by inflation impact on SMB cash flow.
- B-paper: 11% (2022) → 13% (2026).
- C-paper: 14% (2022) → 16% (2026).
- D-paper: 18% (2022) → 22% (2026).
- E-paper: 27% (2022) → 35% (2026).
The rise reflects 2024–2026 macro stress on SMB profitability — wage inflation, supply cost increases, decline in consumer discretionary spending.
How funders manage default risk.
- Underwriting tightening. Top funders have raised minimum FICO 20–40 points since 2022.
- Reduced advance-to-deposit ratios. Average advance ratio has dropped from 110% to 95% of monthly deposits across A-paper.
- Shorter terms. Industry average term has dropped from 11 months to 9 months.
- Mandatory bank account access via Plaid. Allows real-time monitoring vs. monthly statement review.
- Specialty industry exits. Many funders exited restaurant in 2024–2025 due to elevated default rate.
The merchant takeaway.
Default rate by tier is what makes the factor rate structure work. Merchants paying high factor rates on lower-paper deals are effectively paying for the defaults of merchants in the same tier. A merchant who can move from C-paper to B-paper through file cleanup (waiting 30 days to age NSFs off the 90-day window, paying down existing MCA balance before applying) typically saves 5–10 points of factor — meaningful on a $100K advance ($5K–$10K saved).
Common confusion. First, "default rates are public." Mostly false — funders rarely publish; figures above are industry estimates from broker networks and warehouse-lender data. Second, "non-recourse means lower default." False — non-recourse measures lower recovery, not lower default. Third, "default rate equals charge-off rate." Charge-off is 60–80% of default rate after cure activity.
Related terms
- Paper grade (A/B/C/D) — MCA industry shorthand for merchant credit quality. A-paper qualifies for cheapest factor (1.15–1.28); D-paper is high-risk, factor 1.45+, often declined.
- MCA default — Breach of MCA repayment terms — usually triggered by missed daily ACH debits, NSFs, or unauthorized stacking. Consequences range from increased collection pressure to UCC enforcement and personal-guarantee pursuit.
- MCA defaults and collections process — MCA default cascade: missed ACH → cure period (5-10 days) → contract default → COJ filing (5-14 days) → bank account freeze (14-30 days) → personal guarantee pursuit → settlement negotiation.
- How funder portfolio size impacts MCA rates — Larger funder portfolios ($500M+ AUM) offer 4–10 points lower factor rates than sub-$50M shops because they spread risk across more deals and access cheaper warehouse capital.
- Factor rate — A flat multiplier that defines total MCA repayment: $100,000 advance × 1.30 factor = $130,000 repaid. It is not an interest rate; it does not compound.
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