Loss Rate
Loss rate is the net dollar loss on defaulted MCA advances after collections recovery — typically calculated as net charge-off divided by funded dollar volume — providing a more accurate portfolio risk metric than gross default rate alone.
Why This Matters
Loss rate differs from default rate by accounting for recovery on defaulted accounts. A funder with 12% default rate but 50% recovery rate experiences 6% loss rate (12% × (1 - 50%)). Recovery rates depend on collections infrastructure quality, personal guarantee enforcement effectiveness, and merchant willingness to negotiate workout. Strong collections operations achieve 40-60% recovery on defaulted balances; weak collections may recover only 10-25%. Loss rate ultimately determines portfolio profitability after accounting for expected losses against gross yield.
Frequently Asked Questions
Frequently Asked Questions
How does loss rate differ from default rate?
Default rate measures failure to repay according to original terms. Loss rate measures net dollar loss after collections recovery. A funder with 10% default rate but 60% recovery experiences 4% loss rate. Loss rate is the more accurate portfolio risk and profitability metric.
What MCA recovery rates are typical?
30-60% on defaulted balances varies by funder collections capability and merchant profile. Personal guarantee enforcement against owner assets significantly affects recovery. Workout negotiations producing modified payment plans typically recover more than judgment enforcement. Investment in collections infrastructure typically pays back through improved recovery rates.