Business Startup Loans: 9 Key Metrics To Look Out For

Business Startup Loans: 9 Key Metrics To Look Out For

How do you get a small business startup loan?

For new entrepreneurs, it’s very challenging to secure a business loan to startup. Most banks and financial institutions are only willing to extend a business loan to SMEs with operational track record of minimum 2 years.

To secure startup business loans, financing options are very limited and if there’s any, funding amount is expected to be very small initially. There are government assisted financing schemes such as the Temporary Bridging Loan Programme where the state provides some form of risk guarantee. However, for such schemes, the banks usually make the final decision on credit underwriting.

To position your company with maximum chances to qualify for business startup loans or venture capital, you must take note of the below 9 business and financial indicators of your company.

The below key metrics are from Andreessen Horowitz, a reputable Silicon Valley VC firm.


  1. Purchase Orders vs. Revenue

It’s easy to confuse purchase orders with revenue, but they are fundamentally different.

Purchase order: This is the commitment of a customer to spend money with your company. It reflects the contractual obligation on the part of the customer to be a paying customer of the company.

Revenue: This is a result of a payment for an order agreement. How and when revenue is recognized is defined by GAAP.

Letters of intent and verbal agreements are neither revenue nor bookings.


  1. Recurring Revenue vs. Total Revenue

There are two types of companies grouped by the nature of their revenue. One type of companies where majority of total revenue comes from product revenue, whereas another type of company’s majority of total revenue comes from labour and providing services.

The investors usually value the former more. Why? Revenue from labour is non-recurring, has much lower margins; as for the former, you can generate greater profit by sales of product or software.

ARR (annual recurring revenue) is the best metric to evaluate revenue accurately.  It should exclude one-time (non-recurring) fees and professional service fees.

ARR per customer: Is this a flat curve, or an upward curve? If you are upselling or cross-selling, then this curve should be upward, which is a positive indicator for a healthy business. (Note: “Upselling” is a sales technique where a seller induces the customer to spend more money on upgrades or add-ons; “cross-selling” refers to the sales technique where the seller induces the customer to purchase other additional products.)

MRR (monthly recurring revenue): Often, people will multiply one month’s bookings by 12 to get ARR, which leads to two common mistakes: One, including non-recurring fees such as hardware, setup, installation, professional and consulting services; Two, including bookings (see Key Number 1).


  1. Gross Profit

While top-line revenue growth is the first figure lenders and investors usually see, business owners should also take the profitability of the revenue into consideration, which can be evaluated by looking at the gross profit.

The calculation of gross profit (GP) varies from one company to another, but generally speaking, all costs associated with the manufacturing, delivery, and support of a product/service are to be factored in as direct costs. Other indirect costs, such as working capital loan interest or equipment leasing expenses are not attributed to direct costs for calculation of GP.

Gross profit will simply be revenue minus direct costs.


  1. Total Contract Value (TCV) and Annual Contract Value (ACV)

TCV (total contract value) is the total value of the contract, the term of the contract could be both short and long. Make sure the profit of one-time charges, professional service fees, and recurring charges are included in TCV. On the other hand, ACV (annual contract value) has a set timeframe of a 12-month period.

Questions to ask about ACV:  Are you making a few hundred dollars per month, or are you able to close larger deals? This, of course, depends on the market you are targeting (such as small-medium sized businesses, mid-market, or enterprise).

Is the value of ACV growing? If so, it means the customers are paying you more on average for your product over time, which implies that your product is noticeably improving (such as adding features and capabilities), or adding more values to warrant this growth. Because these are the only reasons why customers would be willing to pay more for it.


  1. LTV (Life Time Value)

Lifetime value is the present value of the future expected profits from the same customer over the duration of the business relationship. LTV determine the total gross profit this customer brings in and useful in determining your maximum cost of acquiring a customer.

More importantly, you should calculate a customer’s contribution to the net profit of the company, and budget your cost of customer acquisition accordingly.

Contribution Margin LTV/ CAC (Costs of Customer Acquisition) is also a good indicator, it can help you determine CAC payback period, and therefore manage your advertising and marketing spending more scientifically backed by data.


  1. CAC (Customer Acquisition Cost)

Customer acquisition cost refers to the full cost of acquiring users on a per user basis, but it will get more and more complicated as there are different concepts and forms of CAC.

The first mistake people commonly make with CAC is failing to include costs like referral fees and discounts.

Another common problem is treat CAC as a “blended” cost. You must understand that a lot of new users are acquired through words of mouth; many fail to isolate these from the rest. The real CAC should only include the users acquired through advertising or paid marketing such as paid online traffic, marketing campaigns etc.

This is not to say that blended CAC is wrong, but it uses all acquired users from all channels as a denominator, and the total cost as the numerator to calculate the ratio, which does not accurately reflect if your marketing campaigns are effective and increasing your profits.

This is why investors consider paid CAC (total acquisition cost/ new customers acquired through paid marketing) to be a more important indicator. It tells a company whether it should continue to increase its marketing budget to increase profitably.

You must always analyse each marketing channel to find out how many potential customers you can acquire from each channel.


  1. Month-on-month (MoM) growth

Generally, MOM is very easy to understand, it is simply the average monthly growth rate. But investors often use CMGR (Compounded Monthly Growth Rate) to measure a company’s periodic growth.

CMGR (Compounded Monthly Growth Rate) = (Latest Month’s growth / First Month’s growth)*(1/n of Months) -1). This indicator also helps you benchmark your company against other companies. The CMGR of a growth company is usually lower than the average growth rate.


  1. Net Churn Rate

There are many types of churn in an operation of a company, such as capital churn and customer churn. Every company define these differently. Some companies measure it on an annual revenue basis, which does not exclude the impacts of up-selling.

Investors generally look at the following indicators:

Monthly user churn = lost customers/ total number of customers in prior month

Of course, it is necessary to identify the (capital) gross churn and net churn.

Gross churn: MRR lost in a specific month/MRR at the beginning of the month.

Net churn: (MRR lost- MRR from upsells) in a specific month/MRR at the beginning of the month.

Gross churn reflects the actual loss of business, but understates the level of net churn loss, as it includes the impact of upselling, blending it with absolute churn.


  1. Burn Rate

Burn rate is the rate the capital used to support a company’s operation is decreasing. Once you understand this, you can truly manage how long a company can continue to be in operation.

Lots of start-ups fail halfway because there’s no subsequent capital support when there’s also not enough time to raise more funds, either through equity or SME loans.

Monthly cash burn = (cash balance at the beginning of the year-cash balance end of the year) / 12. There are also net burn and gross burn.

“Net burn” refers to: Revenues (including all incoming cash you have a high probability of receiving from outside) minus “gross burn”. This is the true measure of amount of cash your company is burning every month.

“Gross burn” often only include the monthly expenses. Investors often look at this indicator, but also look at changes in your monthly expense and income at the same time, because of those changes, your monthly burn rate may not always be the same.



If you’re able to understand and master the above 12 metrics, you will find it easier to talk to lenders and investors to fund your startup’s SME financing.

It also helps if your start-up has a great road-map and vision to disrupt and revolutionize an entire industry or market.