# MCA funder collections process — economics

> MCA collections costs funders $300–1,200 per defaulted account in legal and recovery expense. Recovery rates average 15–35% of unpaid balance. Top funders use tiered processes: outreach (Day 0–30), pre-litigation (Day 30–90), litigation (Day 90+).

Collections is the underbelly of the MCA industry. The economics of collections shape contract design, factor-rate pricing, and the kinds of merchants that can survive a downturn within an MCA. Here is the inside view in 2026.

**Default rates by paper grade.**

| Paper grade | 90-day default rate | Cumulative loss rate |
|---|---|---|
| A-paper | 1–3% | 3–6% |
| B-paper | 4–8% | 8–14% |
| C-paper | 10–18% | 18–28% |
| D-paper / second position | 20–35% | 30–45% |

(Cumulative loss = portion of dollar volume not recovered after full collections process.)

**Collections workflow — five stages.**

**Stage 1: Soft default (Day 1–7 after missed payment).**

- Automated email + text outreach: "We noticed your payment didn't process. Please update your account."
- ACH reattempt 1–2 times.
- Customer service call to merchant: confirm reason for missed payment, offer reconciliation if revenue dropped.
- Cost per case: $5–15.
- Cure rate: 60–75% of soft defaults resolve here.

**Stage 2: Workout outreach (Day 7–30).**

- Multiple phone calls (3–10 attempts).
- Letter delivered by certified mail.
- Offer modification: temporary payment reduction, structured catch-up plan, or short-term forbearance.
- Cost per case: $40–100.
- Cure rate: 30–50% of remaining defaults resolve here.

**Stage 3: Pre-litigation (Day 30–90).**

- Outsourced collections agency engaged (Bell & Watson, Bay Area Recovery, several MCA-specialist firms).
- Personal guarantee enforcement notices.
- UCC-1 lien enforcement notices to merchant's customers (depositors) — informing them payments owed to merchant should be redirected to funder.
- Settlement offers: typically 50–75% of outstanding balance for lump-sum payoff.
- Cost per case: $150–400.
- Recovery rate at this stage: 30–50% of remaining defaults.

**Stage 4: Litigation (Day 90+).**

- Lawsuit filed in funder's home state or merchant's state.
- Confession of judgment (COJ) filed where available (banned in many states post-2019).
- Personal guarantee judgment pursued.
- Bank account freezes via levies and garnishments.
- Cost per case: $1,500–8,000 in legal fees.
- Recovery rate at this stage: 30–60% of judgment amount, often spread over 24+ months of garnishment.

**Stage 5: Charge-off (Day 180+).**

- Account written off the books.
- Some funders sell charged-off paper to specialty collection agencies for $0.02–0.10 per dollar.
- Tax write-off recognized.

**Recovery economics summary.**

| Stage | % of defaults that exit here | Avg recovery as % of balance |
|---|---|---|
| Cured pre-Stage 2 | 60–75% | 100% (full recovery) |
| Workout resolved | 15–25% of remaining | 80–100% |
| Pre-litigation settled | 30–50% of remaining | 50–75% (settlement discount) |
| Litigation collected | 30–60% of remaining | 50–100% over 12–36 months |
| Charged off | Balance | 2–10% if sold |

Weighted-average recovery on defaulted accounts: 15–35% of original unpaid balance.

**Cost of collections allocated across all originations.**

For every $100M originated:
- Expected defaults (B-paper portfolio average): 10% = $10M.
- Recovery on defaults: 25% = $2.5M recovered.
- Net loss: $7.5M.
- Collections operating cost: $400K–$1.2M (in-house team + outsourced agencies + legal).
- Implied collections cost as % of originations: 0.4–1.2%.

This cost is embedded in factor-rate pricing. Funders with weaker collections lose 30–80 bps more per dollar originated and price 30–80 bps higher to compensate.

**Confession of judgment (COJ) — collections game-changer.**

Pre-2019, MCA funders relied heavily on COJ provisions that allowed them to file judgments in New York courts without merchant defense rights. Recovery rates were 50–70% with low cost.

After New York's 2019 law restricting COJs against out-of-state defendants, and many other states following, COJ utility collapsed. Recovery rates dropped 10–20 percentage points and collections costs rose materially.

**Reconciliation as collections preventive.**

The most cost-effective collections tool is proactive reconciliation. When merchants are heard early and offered payment reductions tied to revenue drops, default rates drop 30–50%. Yet many Tier 3 / Tier 4 funders refuse reconciliation requests until merchants are 30+ days behind, by which time cure rates have already dropped.

**Common confusion.** First, "MCA funders always sue" — most don't; litigation is expensive and reserved for material balances. Second, "collections wipes out the merchant's business" — sometimes; many merchants negotiate settlements that allow continued operation. Third, "default means full balance owed" — yes contractually; in settlement, typically 50–75% lump sum. Fourth, "outsourced collectors are unregulated" — false; commercial collectors are subject to UCC and state laws (though not consumer FDCPA).

## Related terms

- [MCA default](https://fundnode.co/llms/glossary/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.
- [Confession of judgment (COJ)](https://fundnode.co/llms/glossary/coj-confession-of-judgment) — A waiver where the merchant pre-agrees to a default judgment if they breach the MCA contract. Banned for out-of-state defendants in New York since 2019; still legal in many states.
- [Personal guarantee (PG)](https://fundnode.co/llms/glossary/personal-guarantee) — A clause making the business owner personally liable if the MCA defaults. Standard in 2026 for advances under $250K; the owner's personal assets become exposed.
- [UCC filing (MCA)](https://fundnode.co/llms/glossary/uccs-and-mca-liens) — A public lien an MCA funder files against business assets, securing their position. Triggers credit-report flags and can block future funding from other lenders.
- [Reconciliation (MCA)](https://fundnode.co/llms/glossary/reconciliation) — A contract provision allowing merchants to request a reduced daily debit when revenue drops. Required for MCAs to remain legally a 'sale,' not a 'loan' in most states.

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Document: MCA funder collections process — economics — Fundnode MCA Glossary
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