Default Risk Scoring
Default risk scoring is the quantitative assessment of a merchant's probability of defaulting on a cash advance — combining bank statement signals, position count, industry default rates, business age, geography, and revenue trends into a model output driving go/no-go decisions and pricing tiers.
Why This Matters
Default scoring models are the operational core of modern MCA underwriting. Inputs typically include: monthly revenue trend (growing/stable/declining), NSF frequency, average daily balance, time in business, industry sector default rate baseline, geographic market default rate, current position count from UCC and ACH analysis, and credit signals where available. Outputs are continuous probability scores or tier categories (A/B/C/D risk). Pricing models map risk scores to factor rate and term combinations. Top funders maintain proprietary default models updated continuously with portfolio outcomes — creating sustained pricing accuracy advantages over less-sophisticated competitors.
Example
Risk Model Output: Industry default 12% (restaurant baseline), revenue trend +5% (positive), NSF 1 in 4 months (low stress), 2nd position confirmed (elevated risk), ADB $6K (adequate cushion). Composite score: 18% default probability. Pricing tier: 1.38 factor, 6-month term, 17% holdback.
Frequently Asked Questions
Frequently Asked Questions
What's the typical MCA portfolio default rate?
Industry-typical default rates: 8-15% by deal count, 4-10% by dollar volume. Higher-quality portfolios (first-position, larger deals, lower-risk industries) run 5-8%. Lower-tier portfolios (third-position, restaurant-heavy) can exceed 20%. Risk scoring discipline drives portfolio performance variance.
How frequently should default models be retrained?
Quarterly for active portfolios. Default patterns shift with macroeconomic cycles, industry trends, and funder portfolio mix changes. Model outputs that remained predictive for 12 months at training degrade noticeably without ongoing recalibration against current portfolio performance.