Category · Methodology
Adjusted revenue is the only number that survives collections
When a funded MCA defaults and counsel reviews the file, gross deposits do not hold up. Adjusted revenue does. Why the underwriting figure matters most after the funds wire.
Key takeaways
- Underwriting decisions are tested in two places: at funding, and at collections.
- Gross deposits are the headline number on the bank statement. They were never the underwriting number.
- Adjusted revenue is the figure that survives counsel's review of a defaulted file. Each subtraction is named and reproducible.
- The collections moment is when the underwriting record becomes a forensic record. Every flag, every confidence figure, every synthesis decision is part of it.
- Funders that underwrite to adjusted revenue are funding a number that holds up if the file goes bad.
Two moments that test underwriting
Underwriting decisions are tested twice. The first test happens at funding: did the analyst land on a number the committee can fund against? The second test happens at collections, weeks or months later: when the merchant defaults, can the underwriting record be defended?
Most of the underwriting industry pays attention to the first test. Vyaso pays attention to both.
Why gross deposits do not survive
Gross deposits is the easy number. It is the sum on the statement. It is what the bank shows. It is what an inexperienced analyst circles in red and types into the credit memo.
It is also the wrong number. Gross deposits include lender wires that should not have counted as revenue. They include self-transfers between the merchant's accounts. They include circular flows that round-trip through related parties. They include sale-of-asset proceeds that were one-time.
When the file defaults and counsel reviews the underwriting record, the question is not "did the analyst sum correctly." The question is "did the underwriting figure represent the cash flow the merchant actually generates from operations." Gross deposits often does not. Adjusted revenue does.
What adjusted revenue is
The adjusted-revenue figure is the confidence-weighted aggregate of every credit on the statement. Each deposit carries a confidence between zero and one. Some deposits earn near-full confidence (a customer payment from a known marketplace). Some earn near-zero confidence (a kiting signature). Most earn something in the middle.
The figure is a single number, but it is supported by a reproducible set of subtractions. Each subtraction is named. Each subtraction is traceable to the deposits that drove it. Two underwriters running the same statement land on the same figure.
This is what makes the figure defensible. It is not just a more conservative number. It is a number whose derivation is part of the record.
The collections moment
When a funded merchant defaults, the file is opened by collections counsel. Counsel reads the bank statements that underwrote the deal. Counsel reads the underwriting record. Counsel asks two questions.
- Was the underwriting figure reasonable in light of the statements?
- Were the patterns that subsequently caused the default visible at the time of underwriting?
If the underwriting figure was gross deposits, neither question is easy. Gross deposits was always vulnerable to inflation. Patterns that caused the default were probably visible in retrospect, but the underwriting record contains no flag, no confidence figure, no record that the analyst considered them.
If the underwriting figure was adjusted revenue, both questions answer themselves. The figure already accounted for the inflation channels. Every flag the analyst saw is in the record. Every flag the analyst dismissed is in the record with a confidence figure.
Counsel walks out of the file with a defensible position.
What surviving means
Surviving collections does not mean the funder wins a particular dispute. It means the funder enters the dispute with a record that holds up under scrutiny. The dispute may still go either way on the merits, but the underwriting itself is not the weak link.
The cost of a non-defensible underwriting record is not measured in any single dispute. It is measured across the portfolio in:
- Higher rescission risk on disclosure-regime states
- Larger reserve requirements demanded by counsel
- Pricing pressure from secondary buyers who discount portfolios with weak underwriting documentation
- Reduced deal flow when ISO partners hear that files funded against gross deposits routinely default
Each of these is small in any single quarter. In aggregate, they are why funders that underwrite to adjusted revenue outlast funders that underwrite to gross deposits.
What this requires of the engine
For the adjusted-revenue figure to survive collections, the engine has to meet a higher bar than it would for funding alone.
- Reproducibility. Two analysts running the same file land on the same figure. The figure is not a per-session draw.
- Traceability. Every subtraction is exposed. The underwriter can pull any flag back to the transactions that produced it.
- Stability across versions. When the engine updates, historical analyses are versioned, not overwritten. Counsel can re-run the same file under the version that was current at the time of underwriting.
- Honesty about uncertainty. When the engine is uncertain, it says so. The synthesis step records what it weighed.
These are the requirements Vyaso engineered against. They are also the requirements the collections moment enforces.
The category claim, revisited
An earlier post on this blog argued that Vyaso re-weights rather than subtracts. The methodology post explained why we re-weight at funding. This post is the second half of the same argument: the figure that survives funding has to survive collections, and re-weighting is what makes it survive both.
Vyaso describes itself as the underwriting intelligence layer. The collections moment is where that claim is tested. The funders that pilot Vyaso describe the collections moment as the reason the analysis ends up pasted into the credit memo.
Surviving collections does not mean the funder wins a particular dispute. It means the funder enters the dispute with a record that holds up under scrutiny.