A recurring revenue loan is a type of financing option for businesses that rely on regular, ongoing revenue from subscription, membership, or service-based business models. Instead of requiring collateral like traditional bank loans, recurring revenue loans use your predictable cash flow as the basis for repayment.
How Do Recurring Revenue Loans Work?
Recurring revenue loans are a relatively new financing option tailored to the needs of subscription, SaaS, and other membership-based businesses. Here’s an overview of how they work:
Eligibility Based on Recurring Revenue
Eligibility for these loans depends primarily on your monthly recurring revenue (MRR) as opposed to credit scores, collateral, or personal guarantees typically required for small business loans. Lenders will review factors like:
- Average monthly recurring revenue – Most lenders require at least $25,000+ in MRR. Some may go as low as $15,000.
- Payment history – Having low declined payment rates (under 5%) makes you look reliable.
- Churn rates – Low churn under 10% indicates customer retention/satisfaction.
- Customer concentration – Revenue distributed across many customers is ideal. Reliance on one big client increases risk.
- Contract terms – Multi-year contracts or automatic renewals are favorable.
As long as you meet eligibility standards, the lender can extend financing using your predictable cash flows as the “collateral.”
Funds Secured By Future Revenue
Because eligibility and repayment depend on ongoing revenue streams, these loans essentially allow you to leverage your future recurring revenue today in order to access capital now.
Here’s a simplified example:
- Andy’s SaaS startup generates $30,000 per month in revenue
- A lender reviews his finances and approves him for a $200,000 loan
- The loan terms require Andy to redirect a fixed % of his future monthly revenue back to the lender until the loan is fully repaid with interest
- By locking in future revenue, Andy immediately gets $200,000 to invest in growth
This structure shifts the risk to the lender. But in return, interest rates are often higher than traditional bank loans.
What Are the Steps to Get a Recurring Revenue Loan?
If you want to apply for a recurring revenue loan, here is a high-level overview of what to expect:
1. Check Eligibility
Most lenders allow you to initially qualify based on limited details like:
- Time in business
- Monthly recurring revenue
- Annual revenue
- Gross margin percentage
This helps them screen applicants who meet general requirements before doing fuller reviews. The details will be verified later.
2. Application & Review
If eligible based on initial checks, you will need to provide additional information directly or authorize access to data sources like accounting systems, payment processors, app store subscription dashboards, and so on.
Information examined can include:
- Historical revenue figures
- Client concentration
- Churn and declared payment failure rates
- Typical contract lengths and renewal cycles
- Projected growth and revenue forecasts
Approval decision may take anywhere from days to a few weeks depending on factors like data access and ease of validation.
3. Term Sheet & Closing
Once approved, you get a term sheet outlining proposed terms like:
- Loan amount range
- Length of agreement
- Estimated payment percentage
- Fees
- Interest rate
You can negotiate desired amounts and terms before closing and securing financing.
4. Payments Begin as a Percentage of Revenue
Once the agreement is signed, the lender will set up automated payments subtracted from your revenue streams per the agreement. Repayments may include:
- Percentage debits per transaction from processing systems like Stripe
- Direct withdrawals from business checking accounts
- Deductions from app store subscription payouts
- Other automatic options suitable for recurring billings
As long as eligibility factors remain within approved limits, payments continue until you meet the contracted repayment amount and schedule.
What Loan Amounts and Terms Are Available?
Loan details can vary considerably between lenders. But here are some general guidelines on amounts and terms being offered for recurring revenue loans today:
Loan Amounts
- Minimums around $50,000
- Maximums up to $10 million with some lenders
- Average deals between $100,000 to $500,000
Loan Terms
- 6 months – 4+ year payback periods
- Interest rates typically 11%-30%+ APR
- Origination fees from 1% to 10%
Beyond standard term lengths, some lenders structure more flexible or creative options like:
- Accelerated payments – Pay more when business is best to pay faster
- Expanded payments – Pay less if revenues decline for stability
- Deferred payments – Delay obligations for an introductory period
- Rewards – Lower rates for early repayment
Getting approved for one of these loans does mean giving up a percentage of future revenue in exchange for capital today. So it’s important to partner with a lender that offers customized solutions for your needs and long-term vision.
What Loan Amount Could I Qualify For?
Loan sizes can range quite a bit based on the strength of your recurring revenues. But most lenders work on formulas using multiples of your average monthly recurring revenue (MRR) or annual run rate revenue (ARR) when assessing potential offers.
Typical Formulas
As a general guideline, many lenders work from formulas like:
- 10-20x MRR – Borrow between 10 to 20 times your average monthly recurring revenue.
- 2-5x ARR – Lend amounts equivalent to 2 to 5 times your annual recurring revenue.
So a SaaS company with:
- $40,000 per month in MRR could possibly qualify for $400K – $800K.
- $480,000 per year in ARR might be approved for $960K – $2.4M.
These are rough estimates intended only to illustrate potential scale. Actual amounts depend on all recurring revenue metrics – not just MRR or ARR totals.
Factors Impacting Amounts
Beyond your raw revenue numbers, all metrics discussed throughout this guide can influence approved loan sizes like:
- Strength and length of operating history
- Revenue growth rates
- Contract term lengths
- Renewal and retention rates
- Concentration levels
- Profitability and positive cash flow
- Credit history and scores
- Competitor landscape
- Management quality
- Global vs regional customer base
- Industry growth trends
- Future projections
As you might expect, companies with longer track records, predictable growth, plenty of contract visibility, low churn risks, and healthy financials get approved for larger recurring revenue loans and better rates.
Whereas unproven businesses, high churn products, unreliable growth, new industries, and similar risk factors reduce offers. The more concerns uncovered during underwriting, the lower potential borrowing capacity becomes.
Key Takeaways
- Recurring revenue loans allow you to access large financing today secured against reliable future subscription revenue streams.
- Quickly borrow 6 or 7 figures based predominantly on predictable cash flow metrics versus typical underwriting criteria.
- Ideal for software, SaaS, subscription box, membership site, digital media, and other monthly business models.
- Must demonstrate sufficient operating history, revenue scale, customer diversity, retention levels, and growth potential to qualify and secure competitive offers.
- Compare multiple lender term sheets to find the recurring revenue loan package that best aligns to your unique situation and financial objectives.