Obscure lending options have a way of dealing with a nearly mythical quality, as those of rare deals not available to mere mortals. The truth is usually less glamorous. Obscure funding methods tend to be obscure because they’re niche and targeted at a particular type of borrower under very specific conditions.
Such is the situation with Monthly Recurring Revenue (MRR) lines of credit — a form of venture debt created for a really specific type of tech business that offers subscription memberships for software it provides like a service (Saas). For these tech companies, MRR credit lines could be a low-cost method of accessing funds on-demand, albeit with some potential drawbacks.
Want to know much more about MRR lines of credit and who they’re for? Read on.
What Is An MRR Credit line?
To know very well what an MRR credit line is, let’s first consider what the concept behind a credit line is:
A line of credit permits the borrower to attract against a borrowing limit established through the lender. The borrower can draw as frequently as they want as long as the quantity drawn doesn't exceed their credit limit. Interest rates are paid around the quantity of credit used. When the credit line is recognized as a revolving credit line, any balance you have to pay off can later be drawn upon again as long as the line’s draw window remains open.
When a lender extends a credit line, your credit limit is based on what the lender believes you are able to reasonably repay according to your revenue and cash flow, or what your assets can cover. The previous case would be a line of credit. Within the latter case, you would supply some type of collateral (cash deposit, inventory, equipment, land, etc.) as security or — when it comes to an asset-backed credit line, the need for your asset would be your credit limit.
An MMR credit line combines aspects of many of these. Whereas an unsecured line of credit estimates a regular monthly and annual revenue stream to find out a borrowing limit, an MRR credit line treats monthly recurring revenue like a kind of asset you can use to secure the line. What counts as MRR? Typically this means subscription services in which clients are paying regular, reliable fees each month.
This allows companies that offer services instead of tangible products–think software-as-a-service (SaaS) companies, for example–to leverage their subscriptions as a form of security.
How An MRR Credit line Works
An MRR line of credit is aimed almost uniquely at SaaS companies, although companies concentrating on the same subscription-based revenues could also qualify.
Essentially, a lender that provides an MRR will consider your overall monthly subscription revenue as well as your monthly growth rate in subscriptions, as well as your monthly costs. Usually the dpi is a multiple of the MRR (usually between 3x to 6x), multiplied from your churn rate. As the MRR may vary from month-to-month, so may your credit limit during the period of your MRR.
It’s worth pointing out that the churn rate–the number of customers you fail to retain each month–is one of the key deciding factors with an MRR. The low your churn rate, the greater easily you’ll qualify and also the higher your credit limit will be. As a rule, you'll need a less than 15% churn rate. Similarly, growth can also be an essential consideration because it demonstrates what you can do to service your debt.
So, let’s say you’ve got a nice little appointment scheduling software business. You’ve got an MRR close to $200K, having a 10% churn rate. Your MRR line of credit lender assess you utilizing a 3x multiplier, approving you for any borrowing limit of $540,000 ($200,000 x 3 x 0.9).
The typical term to have an MRR LoC is between one to three years. In that time you are able to draw as much so that as frequently as you want so long as you don’t exceed $540,000. Rates of interest typically vary from Prime to 14% APR.
Note that MRR LoCs often, but not always, require warrants or equity inside your company. A warrant is basically the option to buy stock in your company in a specific price, with a specific date.
How MRR Credit lines Compare
MRR credit lines may seem a lot like some other financial instruments you’ve heard of. Let’s clear up the confusion.
MRR Line Of Credit VS Installment Loan
Installment loans differ from all lines of credit. Instead of extending a line of credit, the lender will provide a lump sum of money which is deposited inside your banking account, provided to a vendor from whom you’re buying a good thing, or provided in check form. This payment is made once and all sorts of at once; there’s no draw period or revolving credit.
You’ll pay off the amount your debt, called the principal, plus either accumulated interest or a flat rate on the set amount of time. This is accomplished in once a month, weekly, or daily installments.
As you may imagine, this makes quick installment loans a smaller amount versatile than MRR lines of credit. On the other hand, they’re more abundant, easier to get, and can likely have better interest rates than comparable lines of credit.
MRR Credit line VS Traditional Line Of Credit
The differences between an MRR credit line and a “traditional” line of credit tend to be more subtle. Both allow you to draw against a recognised credit limit. Both are usually revolving. Both usually require you to only pay interest on the amount of credit you utilize.
The difference is the fact that you’re using your subscription-based business design to demonstrate you’re worth your line of credit instead of securing it with assets or receivables. That’s about this, really.
Though MRR LoCs are less frequent, some lenders consider businesses with monthly recurring revenue to be a lower risk than other manufacturers — so long as their account churn is low. Knowing that, you might be able to get a better deal by choosing an MRR LoC, all other things being equal, assuming your business model qualifies you for one.
MRR Credit line VS Revenue-Based Financing
Going by their names, you’d be forgiven for thinking “monthly recurring revenue” implies MRR lines of credit really are a kind of revenue-based financing. Nevertheless, MRR LoCs are debt financing, they just make use of a very specific type of revenue to gauge your worthiness like a borrower. Having said that, MRR lines of credit can involve equity participation, particularly if your lender is a venture capitalist or angel investor, so be sure you understand what you’re engaging in beforehand.
Revenue-based financing, however, is a way to raise money from investors without quitting equity in your company. In exchange for a lump sum payment or similar cash infusion, investors will receive a share of your business income until they’re recouped an decided amount, that is usually a multiple from the amount provided. Since the repayments are revenue-based, they'll fluctuate depending on how well your small business is doing.
In comparison, MRR payments don’t take that into account; your instalments depends how much of your credit you’ve used.
When An MRR Credit line Is A Good Option for Your Business
MRR credit lines are extremely specialized, which means the vast majority of businesses simply don’t fit the profile. That said, they do offer qualifying businesses some distinct advantages.
Advantages Of MRR Lines Of Credit
- Low cost: MRR lines of credit tend to have very low rates.
- High credit limits: It may surprise you, but MRR credit lines tend to offer higher credit limits than qualifying companies would usually be capable of getting with a different credit line.
- Credit limit grows with MRR: As your customer base grows, so will your borrowing limit.
- General LoC advantages: Pretty much all the advantages of a “vanilla” line of credit apply here, like the ability to get liquidity to your on the job demand, and just paying interest on the amount that you’re using.
Disadvantages Of MRR Lines Of Credit
- Limited availability: You have to fit the MRR model to qualify and, even so you might want to perform some searching to locate a lender.
- Low churn required: If there’s a lot of volatility inside your month-to-month subscriptions, you may not qualify.
- Minimum annual revenue: You’ll have to hit a yearly recurring revenue benchmark to get certified in many instances. This is usually locally of $3 million.
- You may have to offer equity: Depending in your lender, you may have to offer equity or even the choice to buy stock in the company.
What You have to Qualify
To qualify, you’ll have to provide a subscription or membership service with high retention rates.
In most cases what this means is a company within the tech industry. You’ll also need to be growing, although the good news is that you simply might not have to become profitable as long as your projected growth rate looks good. You’ll also, ideally, have an annual recurring revenue with a minimum of $3 million.
Where You'll find An MRR Credit Line
As a very specialized financial option aimed at tech businesses, you may immediately think of venture capitalists, angel investors, and similar independent non-bank lenders. And in this example, you’d be right. You’re best bet for locating these types of investors is thru word-of-mouth referral if you’re lucky enough to get be connected to an investment scene. The next best bet is to use services like AngelList, SeedInvest, etc. to find and contact investors.
If that doesn’t sound appealing, you can also try to use what’s known as a “venture bank.” These are venture capital companies that combine elements of banking and venture capital firms. Some prominent these include Silicon Valley Bank and Venture Banking Group of Pacific Western Bank. These entities offer venture-debt services, including MRR lines of credit. Just be aware that they will require warrants as part of their financing agreement, and therefore they’ll reserve the choice to buy equity in your business.
Learn About Other Financing Helpful information on Businesses
Not a tech company offering a SaaS by means of subscription? You’re in good company. Luckily, there are tons of other ways to invest in your organization, whether you’re searching for venture-based funding or even more traditional debt-based lending.
Check out our resources on:
- Guide To Getting A company Line Of Credit For Small Businesses
- The Merchant’s Help guide to Installment Loans
- How To obtain a Small company Loan: The Step-By-Step Guide
- 14 Types of Alternative Financing For Small Businesses
