Many tech companies only think in terms of equity or convertible debt when it comes to funding. Banks and boutique lenders are increasingly focusing on the technology sector and offer financial products that are more adapted to the needs of early-stage tech companies. Whether it’s to finance a specific project, support hyper growth, add a few precious months of runway or secure an extra cash cushion to weather the storm, there are debt products available on the market that can make a big difference for startups.  

Two interesting products for startups are monthly recurring revenue (MRR) and innovation tax credit (SR&ED) financings. Export Development Canada (EDC) and Investissement Québec (IQ) can also provide guarantees under certain conditions. For example, to qualify for the EDC guarantee program, the company needs to have, or plan to have, sales or operations abroad. Those guarantees reduce the credit risk for the lenders as a portion of the financing becomes guaranteed by EDC and/or IQ.

What is MRR financing?

MRR financing normally takes the form of a credit line and is available for companies with a subscription-based sales model. The rationale behind these financings is that companies with monthly recurring revenue offer the banks a better sight and more comfort on future cash flows borrowers will generate and therefore, it mitigates risks for lenders. Of course, lenders will look at past revenue growth as well as projections and burn but will also pay a special attention to the borrower’s churn rate. In other words, banks will want to know how many customers a company loses every month and how many customers it gains (and what it means in revenue dollars, i.e. net churn). Obviously, companies with higher churn will be seen as riskier for banks whereas companies with very low or no churn will be safer, assuming business is growing and the burn rate is reasonable. 

Lenders will typically ask for a detailed financial model with historicals and projections (at least 3 years). In addition to a list of customers, they will likely also ask for a list of receivables and payables. As much as financials are important to obtain MRR financing, founders should also treat their meetings with banks the same way they do when they pitch VCs. Bankers need to believe in the business model and the more excited they get regarding the company’s potential, the harder they will work to come up with competitive terms and convince their credit and/or SaaS committees. Speaking about the strength of the management team, the quality of the shareholder base and future expansion plans go a long way in getting the banks interested to lend money to startups.

What are the typical terms for MRR financing?

Borrowing base

The “borrowing base” is what determines how much a company can draw down each month regardless of the authorized amount of the credit facility. The borrowing base is normally calculated by multiplying the company’s MRR by a multiple (to be negotiated with the lender; typically between 3x and 6x) and then multiplying that sum by the company’s churn rate (often the average rate of the last 3 months). For the purpose of determining the borrowing base, the lenders will exclude specific claims such as priority claims or any other claims resulting from non-recurring revenue. It is to be noted that the lenders usually have a large discretion when it comes to determining which claims shall be excluded or not from the MRR calculation. Borrowers will need to provide a borrowing base certificate to the bank on a monthly basis which sets out the calculations and attest that the numbers are accurate. Other monthly deliverables may be required by lenders such as a list of receivables, detailed on churned customers and pre-agreed metrics. The advances made under the credit line cannot, at any time, exceed the borrowing base.


Typical fees imposed by banks in connection with MRR financings include:

  • An interest rate on borrowed amounts (usually between 6% and 9% for companies with a more established business and predictable cash flows; 10% and up if business is less mature and riskier);
  • A standby fee for unused amounts (calculated on the unused portion of the borrowing base and payable monthly); and
  • A small monitoring fee (usually a fee of no more than a few hundred dollars payable monthly). 


Founders seeking MRR financing can also expect lenders to ask for securities on their company’s assets. Personal guarantees however are very rare with that type of financing so entrepreneurs are rarely personally on the hook. A first ranking universal hypothec on all of the company’s assets is often requested along with a negative pledge over intellectual property. If the borrower already has creditors (e.g. loans or convertible notes), lenders will likely request that the other creditors accept to subordinate and cede rank. It’s therefore very important for companies to plan ahead and consider keeping their key creditors and shareholders updated on their financing process. Not being able to obtain a cession of rank from another creditor can jeopardize the financing and/or considerably delay it. If the lenders can obtain some sort of guarantee from a third party (a shareholder or a governmental agency for example), it would considerably ease the credit approval process and the company might be able to negotiate better terms given the reduced risk for the lender. However, finding a guarantor for a VC-backed startup is not an easy thing to do. 

As mentioned above, EDC has a guarantee program for financings of high-growth companies with sales or operations abroad. They work closely (and seamlessly) with banks and can, subject to certain parameters, guarantee a material portion of the financing in favour of the bank, allowing the bank to unlock additional working capital for companies. This is an extremely interesting program for tech companies with global ambitions in need of debt financing.

EDC’s mandate is to help Canadian companies grow internationally by unlocking working capital using a variety of our solutions including guarantees, insurances and financing. In recent years, the Canadian tech ecosystem has grown significantly and Canadian technology has demonstrated outstanding performance globally. In partnership with Canadian financial institutions, we strive to provide access to additional cash flow and financing to companies signing international contracts. At EDC, we’re the international risk experts. We take on risk, so companies can grow their business with confidence.

– Zeeshan Fazal, Senior Account Manager in the Technology Group at EDC

Other conditions

Banks will often ask the borrowers to subscribe to an insurance policy and designate the bank as the beneficiary of any proceed arising out of that policy. Companies will obviously need to provide financial statements and an updated financial model on a regular basis and at least yearly. Some banks will also ask for audit rights (the ability to show up at the borrower’s offices with prior notice to inspect the business) and that all of the borrower’s banking activities be transferred to them. Lastly, venture and mezzanine debt providers (as well as some US-based financial institutions) may possibly ask for warrants in order to secure a kicker on their debt deal. 

How can I get MRR financing?

Many, if not most, large Canadian banks now have an innovation banking team or at least a few bankers looking after the tech sector. Not all the banks are equally invested in the sector though. Some banks have more appetite for servicing earlier-stage startups and high-growth companies than others. If you are a tech startup with recurring revenue looking for MRR financing, a good question to ask the bankers you meet with is what metrics are important for them. If they respond EBITDA and other traditional metrics, you’re probably speaking to the wrong person (or the wrong bank)! American venture lenders like Silicon Valley Bank and WTI are also present in the Canadian market. We have heard that some banks have paused MRR financings in the last few months and some have even pulled term sheets but others are still very much active with funds to deploy. Obviously, given how solicited their capital is and how busy bankers are navigating through the pandemic with their existing clients, it may take a little longer to close a financing and banks might be a bit more conservative with risk assessment. 

What is SR&ED financing?

SR&ED are tax credits innovative companies can claim under the Scientific Research and Experimental Development Program of the federal government. The SR&ED Program, according to the government, provides more than $3 billion in tax incentives to over 20,000 companies annually, making it the single largest federal program that supports innovation in Canada.

Companies qualifying to receive these tax credits can finance their SR&ED claims. The financing normally takes the form of a revolving loan with terms that are similar to the ones described above for the MRR financing. SR&ED financing is offered by financial institutions on a stand-alone basis but is also regularly combined with other credit facilities such as MRR financing. Banks will typically finance a portion of the filed and accrued SR&ED for the current year and the following one. In other words, the company will have the opportunity to access future SR&ED in advance, as a loan. They will ask the borrowers to provide a certified copy of their balance sheet confirming the amount of eligible expenses and of refundable SR&ED credits. A copy of the borrowers’ tax returns and a confirmation of the eligible expenses by an accounting firm will likely be required as well together with a copy of the SR&ED filings, as applicable. 

The maturity date for a SR&ED financing will typically be when the tax credits are offset against income taxes to be paid by the borrower or when a refund is received. If the company receives a notice challenging the tax credits or if taxes are not duly filed, banks will want full repayment of the facility by a certain date. In the event that a tax refund is paid to the borrower, the banks will want the refund to be paid directly to them or oblige the borrowers to immediately apply the refund amount to the facility.

Companies can take advantage of the SR&ED tax incentives by pooling eligible expenditures and deducting them against their current annual income or keeping them for a future year. Companies can also earn investment tax credits and use them to reduce the income tax they need to pay. There are specific criteria on what types of expenses are eligible and there are varying benefits applying to different types of organizations. At a minimum, to be eligible for the SR&ED program, expenses should be conducted in Canada and relate to basic research, applied research or experimental development. For more information on the program, consult the government website here.

Companies wishing to claim those tax credits will be audited by a representative of the Canada Revenue Agency (CRA) and therefore, working with a reputable SR&ED advisor is highly recommended. There are specialized consultants who can assist companies with their SR&ED claims and most large accounting firms can also provide assistance.

SR&ED credits are very important for many innovative startups across the country. In addition to leaving more cash for tech companies to support their growth, it also incentivizes them to keep R&D jobs in Canada. The Canadian Advanced Technology Alliance (CATA) ran a campaign earlier this year to convince Ottawa to expedite SR&ED funding that had been delayed because of COVID-19. CATA reported that nearly $200 million in SR&ED credits had been blocked after the CRA decided to pause business auditing as it switched to remote working. We understand that this work has resumed and tech companies have started to receive their SR&ED credits.