Calculating the True Cost of Capital: MRR to ARR Loans

By Michael Walkinshaw

Posted December 23, 2020

In the past few months, we have seen an increasing number of online advertisements promising entrepreneurs that they can convert their monthly recurring revenue (MRR) to annual recurring revenue (ARR) financing.

This typically means that an entrepreneur can take a contracted payment stream of MRR and convert it to an upfront payment that approximates an ARR payment via a third-party debt provider.

In the examples we have seen, a debt provider offers to convert MRR contracts to ARR contracts by paying you 10 months of MRR today, in exchange for collecting the 12 months of MRR directly into their own account.


A SaaS company wins a new customer who signs an annual contract with 12 monthly payments of $1,000 due on the last day of the month (first payment due January 31, last payment due December 31).The SaaS company accepts a payment from a creditor of $10,000 in exchange for relinquishing 12 x $1,000 payments.At first glance, this may seem reasonable. The SaaS company gives up two out of 12 months of revenue to fund operations in exchange for cash upfront.

A simple calculation of 2/12 would misleadingly show a 16% interest rate on the finance but…

…the actual interest rate is 41.5-51.4%!

How is that possible? Because the SaaS company is receiving monthly payments of $1,000 from its customer, the “principal” of the loan is decreasing every month. So, while the company may owe $12,000 in January, by July it only owes $6,000, and by December, it only owes $1,000. As such, the average amount it owes throughout the year is $6,000.

In essence, the company is paying $2,000 interest on an average loan value of $6,000.

A simple extended internal rate of return calculation (XIRR function in Microsoft Excel or Google Sheets) helps demonstrate this.



In Table 1, the XIRR function calculates the interest rate on the loan if $10,000 is advanced on January 1 and paid back in full on December 31 ($10,000 principal and $2,000 interest). This doesn’t account for the customer MRR payments of $1,000 that decrease the loan principal each month.

Tables 2 and 3 demonstrate the actual interest rate based on two scenarios:

  • Table 2: The $10,000 loan is advanced on January 1
  • Table 3: The $10,000 loan is advanced on January 31, minus the $1,000 paid by the customer MRR for that month.

As you can see in Table 2 and Table 3, the actual interest rate on the loan of $10,000 is 41.5% to 51.4% respectively.


Table 1. Perceived Interest Rate: 20.0%

Jan 1Loan Advanced-$10,000
Jan 31Doesn’t Account for Customer MRR Payments$0
Feb 29$0
Mar 31$0
Apr 30$0
May 31$0
Jun 30$0
Jul 31$0
Aug 31$0
Sept 31$0
Oct  31$0
Nov 30$0
Dec 31Principal + Interest Paid$12,000
Interest Paid20.0%
Table 2. Actual Interest Rate if $10K is Advanced Jan 1: 41.5%

Jan 1Loan Advanced-$10,000
Jan 31Customer MRR Payments$1,000
Feb 29$1,000
Mar 31$1,000
Apr 30$1,000
May 31$1,000
Jun 30$1,000
Jul 31$1,000
Aug 31$1,000
Sept 31$1,000
Oct  31$1,000
Nov 30$1,000
Dec 31$1,000
Interest Paid41.5%
Table 3. Actual Interest Rate if $10K is Advanced Jan 31: 51.4%

Jan 31Loan Advanced
(Minus $1,000 Customer MRR Payment for Jan)
Feb 29Customer MRR Payments$1,000
Mar 31$1,000
Apr 30$1,000
May 31$1,000
Jun 30$1,000
Jul 31$1,000
Aug 31$1,000
Sept 31$1,000
Oct  31$1,000
Nov 30$1,000
Dec 31$1,000
Interest Paid51.4%

There Are Better Financing Deals Out There

As you can see from the example above, MRR to ARR loans can be misleading. There are better finance deals out there for recurring revenue businesses—even venture capital can deliver a better cost of capital!

Another option would be to offer a smaller discount to customers in exchange for upfront payments—you’d still come out ahead.

Mutually Beneficial Capital

At TIMIA Capital, our mission is to create value for entrepreneurs and investors. We do this by providing unique financing solutions to SaaS companies that enable entrepreneurs to create even greater returns for their business while also enabling investors to earn their target return for an acceptable amount of risk.

Our whole business is founded on the premise of this mutually beneficial relationship. Come talk to us if you’re looking for some fair capital to help you meet your goals.

Talk to us


Mike Walkinshaw, CEO

Mike joined TIMIA as the CEO in August 2015. He is experienced in revenue financing, venture debt and venture capital investing. Previous to TIMIA, he was the Co-Founder and Managing Partner of Fronterra Capital, as well as Managing Partner, CFO at Chrysalix Energy. Before working on the finance side, Mike worked in the technology manufacturing sector in product and program management, strategy and planning.

Mike has a Bachelor of Commerce from University of BC, and a formal CPA designation.

Mike’s LinkedIn



Be up to date with the latest news