Your SaaS company’s revenue depends on regular subscription fees. The “Monthly Recurring Revenue”, or MRR, is the metric used to evaluate revenue growth in a SaaS business.
But what happens when you want to scale your business by growing your customer base? You need more than just revenue (MRR)—you need growth capital. One way to get this growth capital is by financing your company’s recurring revenue, known as MRR financing. In this article, we’ll explore MRR financing in more detail. We’ll look at what it is, how it works and why it’s such an attractive option for SaaS companies.
What is MRR?
Monthly Recurring Revenue, or MRR, is the total predictable income generated by a business from its active subscriptions. In simpler terms, it’s the amount of inflow a business can expect to receive per month.
MRR has long been an important metric for subscription-based companies and SaaS companies in particular, as it serves as an indicator on operational wellbeing and forecasted revenue. With MRR, you can assess current financial health, as well as project future earnings and outcomes.
In its simplest form, MRR is calculated by multiplying the Average Revenue Per User (ARPU) by the number of monthly subscribers. This should include charges for any recurring add-ons, however excludes one-time fees.
How to calculate MRR
MRR = Number of subscribers under a monthly plan x ARPU
For example, suppose you have 5 subscribers on a $200/month plan. The MRR from this would be:
(5 x $200) = $1000
In the case of subscriptions that are billed annually, MRR is calculated by dividing the annual charge for the plan by 12, and then multiplying it by the quantity of subscribers on the plan.
What is MRR Financing?
There are two primary types of MRR financing:
- An MRR Line, which is a bank loan product.
- Revenue based financing (RBF)
Understanding an MRR Line
An MRR Line is a loan facility in which the amount available for borrowing is tied directly to the borrower’s monthly recurring revenue. Annual revenue requirements vary by lender, but for an MRR Line, lenders often require $3M ARR.
Since an MRR Line has a revolving structure, you can use the funds repeatedly as the debt is paid down. The maximum amount that can be borrowed can change every month, though, because this is determined according to your company’s revenue.
The size of the MRR Line is at least 3x the value of your MRR. For example, let’s say you have $750,000 in MRR and you’re looking for an MRR Line. The lender would likely offer you funding of $3M.
An MRR Line is typically used by SaaS and tech companies that have long-term recurring contracts with enterprise clients.
One benefit of taking an MRR Line is that as the principal is repaid, the capital can be drawn again, functioning much like a line of credit.
Understanding RBF
When underwriters are looking at a company for RBF, they want to make sure that there is a predictable path of growth for the company. This is where monthly recurring revenue (MRR) is important. The higher your monthly recurring revenue, the more confident an underwriter can be in lending you money.
In addition to being a predictor of growth, MRR can also be used to calculate how much RBF financing a company can borrow. The general rule of thumb is that you can borrow approximately 30% of your ARR (Annual Recurring Revenue), which is 12 x MRR.
It’s important to note that your MRR is not the only factor that underwriters look at when considering an RBF. They will also look at your company’s year-over-year growth rate, current cash flow, and cash balance.
One significant factor that makes RBF a unique and favorable MRR funding option for companies with recurring revenue is its flexibility of payment options. When your MRR goes up, your payment goes up, and when your MRR goes down, your payment goes down, which eases the pressure during tough times.
RBF is often confused with an MRR Line. Both are growth products based on a percentage of a company’s revenue, but they’re quite different.
Key differences between an MRR Line and Revenue Based Financing
Although both financing options are created for recurring business models, an MRR Line is typically only accessible to more established companies because of its relatively high revenue requirements compared with revenue-based financing.
Here’s a quick overview of the key differences:
| Revenue Based Financing | MRR Line | |
| Funding criteria | ARR minimum requirement ($500,000) YOY Growth rate (>30%) Cash flow | ARR minimum requirement ($3 million+) Churn rate (<15%) Equity funded |
| Amortization | Fully | None |
| Collateral requirement | None | Yes and varies, but typically warrants are required |
| Payment | Flexible monthly payment—predetermined percentage of your MRR | Fixed payment based on predetermined interest rate ranging from Prime to 14% APR |
| Other fees | Varies. May include process fees. | Commitment fee Unused line fee |
| Equity share | None | Warrants are likely required. Often only available to venture-backed companies |
To summarize, the MRR Line’s features include:
- Founders can draw on approved balance when needed, as long as the pre-approved credit limit isn’t maxed out.
- Founders may need to provide warrants.
- MRR Line usually requires a company to be venture-backed to qualify.
- The barrier to entry is higher, so only more successful businesses can qualify.
- The MRR Line monthly payments are fixed.
Alternatively, RBF has a much lower requirement to entry and a lot more flexibility to offer:
- Founders receive the fully-approved amount of capital when they are approved for RBF.
- Founders do not need to provide warrants to receive funding.
- RBF does not require a company to be venture-backed to qualify.
- The barrier to entry is much lower, so you can qualify much sooner in your growth journey.
- RBF payments flex with your actual revenue—when you make less, you pay less.
What’s the right MRR financing for me?
MRR financing, for its unique nature (the amount, terms, etc.) is best suited for companies that are not asset-intense and have predictable, recurring revenue.
Subscription-based businesses like SaaS and eCommerce companies are a great fit for MRR financing.
We may be biased, but we truly believe that revenue-based financing is the best type of MRR financing for SaaS startups.
A few key reasons why a company might choose RBF over an MRR Line:
- Speed and simplicity
RBF is typically much quicker and simpler to obtain than other forms of financing. The typical funding qualification takes only a few days.
- No dilution
With RBF, the company does not have to give up equity, so there is no dilution of ownership.
- Ongoing funding
Companies can apply for multiple rounds of RBF for ongoing needs as they grow, such as expanding the sales team, marketing, or product development.
- Predictable payments
The monthly payments for revenue-based financing are based on a percentage of your actual revenue, so they are very predictable. This makes it easy to budget and plan for the future.
- Scalability
Revenue-based financing can be scaled up or down as needed, which gives the company more flexibility in terms of growth.
How do I know when I can apply for MRR financing?
First, you need to have predictable, recurring revenue. MRR financing is only available to subscription-based companies that are generating more than the minimum required revenue.
Every provider is different. To be considered, though, you generally need revenue of $500,000 to be considered for RBF, and $3M to apply for an MRR Line.
A few telltale signs that MRR financing might be a good fit for your company:
- You have long-term contracts
If you have long-term contracts with customers, then your predictable stream of revenue can be used to finance growth.
- Your MRR is growing
Another indicator that MRR financing might be a good fit is if your company’s MRR is growing quickly. This means that you have a lot of potential revenue to finance growth.
How can MRR financing help my business grow?
MRR financing is an innovative way to get your business the growth funding it needs without taking months or years. It is a perfect solution to smooth cash flow for seasonal/cyclical businesses and can be a capital bridge between equity rounds.
Some of the ways that MRR financing can help your business expand:
Hiring new employees
With MRR financing, you can easily afford to hire new employees, including expanding your sales team, which can help you grow your business more quickly.
Marketing and advertising
Marketing and advertising can be expensive, but with MRR financing, you can afford to reach a larger audience by implementing targeted digital ad campaigns.
Product development
The cost of SaaS product development is often expensive, but with MRR financing you can afford creating new products or implementations for business growth.
Smooth cashflow during the off-season
In the off-season of seasonal businesses, it can be tough to invest in continued growth. With MRR financing, you can afford to keep staff and resources, and invest in growth during the peak season.
How do I decide which RBF company to work with?
Whether you are applying for an MRR Line or a revenue-based financing (RBF) product, it is important that you’re not only thinking of your current needs, but how this lending partner will grow with your business.
Three things to consider when choosing a revenue-based financing company:
1. Relevant Industry Experience
First, you’ll want to make sure the company has experience in the industry that you’re in. Even though the RBF provider doesn’t take any of your company’s equity, it can be beneficial for your investor to understand your industry.
If an RBF company specializes in your industry, it means its financing products can directly meet your needs. For example, if you have a software company, you may want to work with one of the best RBFs for SaaS because they offer financing options that make scaling a software business easier.
2. Scalability and Support for Future Needs
Finding new investment every few months (or every few years) is time-consuming and exhausting. As your business grows, you’ll need an investment partner that can accommodate that growth quickly. Partnering with an investor who can support your future funding needs allows your company to scale faster.
3. Fundamentally Good
Because there’s no equity trading involved, this is often overlooked. But it is important to make sure the company has a good reputation. Do their customers have good things to say about them? Are they transparent and easy to work with?
When you’re looking for an RBF partner, it’s important to do your research and ask around to get recommendations. It’s also a good idea to talk to several companies before making a decision.
Other factors to consider include:
- How did they treat you during the sales call? Will they be easy to work with?
- What do their other customers say? And are those companies similar in size to you?
- What happens in tough times? Will your payment flex with your revenue?
- Are they aligned with your growth target?
The Bottom Line
When it comes to financing your company, MRR financing can be a great option.
It’s quick and easy to obtain, and the payments are very predictable. The funding can also be scaled up or down as needed, making it a very flexible finance option.
Don’t just settle for money. It is necessary to do proper research first and consider several important factors such as the financing options, reputation, customer service, industry expertise, and communication styles.
Ask the company you’re evaluating what expertise their capital funding and team add to your company, making them a more valuable finance partner.
