Financing with MRR Line of Credit
One of the joys of running a business is finding ways to finance growth. One type of financing that is unique to SaaS businesses is an MRR line of credit.
Traditional financing sources include equity sales, term loans, and standard lines of credit. But sales of equity are dilutive and require a business valuation—a big disadvantage for small or pre-revenue businesses.
Banks are reluctant to offer term loans and standard lines of credit to start-ups due to high risk of failure. SaaS companies face additional difficulties utilizing these options, as they generally lack sizable AR or inventory balances to serve as collateral.
But there is another type of financing that has grown as an option over the last decade or so: an MRR-based line of credit. With an MRR line of credit, a lender extends a borrowing amount based on a multiple of the borrower’s MRR.
Advantages of this method include the ability to draw funds only as needed and a borrowing base that grows with MRR. Additionally, MRR lines of credit can be obtained before the business is profitable.
Drawbacks can include an ARR minimum to qualify, covenant requirements, and stock warrants for the lender.
Find Venture Debt has more information about MRR Lines of Credit.