# MCA funder portfolio default rate by tier

> A-paper portfolios default at 6–10%, B/C-paper at 10–18%, D-paper at 15–25%, E-paper at 25–40%; the gap drives the factor-rate spread between tiers.

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:

1. **First default:** 1+ NSF or bounced ACH within 30 days of expected collection.
2. **Material default:** 30+ days of zero collection.
3. **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.**

1. **Underwriting tightening.** Top funders have raised minimum FICO 20–40 points since 2022.
2. **Reduced advance-to-deposit ratios.** Average advance ratio has dropped from 110% to 95% of monthly deposits across A-paper.
3. **Shorter terms.** Industry average term has dropped from 11 months to 9 months.
4. **Mandatory bank account access via Plaid.** Allows real-time monitoring vs. monthly statement review.
5. **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)](https://fundnode.co/llms/glossary/underwriting-paper-grade) — 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](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.
- [MCA defaults and collections process](https://fundnode.co/llms/glossary/mca-defaults-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](https://fundnode.co/llms/glossary/mca-funder-portfolio-size-impact-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](https://fundnode.co/llms/glossary/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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Source: https://fundnode.co/glossary/mca-funder-portfolio-default-rate-by-tier (HTML version)
Document: MCA funder portfolio default rate by tier — Fundnode MCA Glossary
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