Recurring Revenue Lending in European Mid-Market Software and Tech: Structures, Pricing, Risks

Recurring Revenue Loans: Structure, Pricing, and Risks

Recurring revenue lending is senior secured debt sized and governed off contracted, repeatable revenue rather than EBITDA. Think of ARR and MRR as the yardsticks: ARR is the annualized value of active subscriptions; MRR is the monthly run-rate. Net retention tells you how that base grows or shrinks after upgrades, downgrades, and churn.

In practice, these loans give software and tech companies with visible subscriptions but thin or negative EBITDA a way to fund growth while preserving equity. The lender underwrites the predictability of revenue streams and the discipline of cash, not the current margin profile. That distinguishes recurring revenue loans from venture debt with warrants and from receivables-based ABL, which ties capacity to invoices rather than contractual subscriptions.

Why recurring revenue loans fit European mid-market tech

In Europe’s mid-market software and tech, these loans fund businesses that emphasize product and go-to-market investment. Borrowers range from late-stage venture-backed companies to sponsor-owned platforms still building EBITDA. Structures are usually unitranche or senior secured term loans, often paired with a small super senior revolving credit facility for working capital. Sponsors use them to fund add-ons, product expansion, and runway at valuations they view as attractive.

Pricing has been tighter than venture debt and wider than EBITDA-based unitranche given weaker loss absorption and softer collateral. As a guidepost, senior ARR loans in Europe have priced at mid-to-high single-digit margins over base, with OID and fees pushing all-in double-digit yields in 2023-2024. Average all-in private credit yields topped 11% in H1-2024, and the ECB deposit rate sat at 4.00% as of September 2024. Those anchors shape borrower affordability and tax interest caps.

Definition, scope, and who should not use it

Purpose: Debt sized to recurring revenue and retention, not EBITDA. Common in SaaS, data, payments, managed services, cloud infrastructure, and software-enabled services with contracted or auto-renewing revenue.
Out of scope: Pure usage revenue with no minimums, early-stage companies with volatile churn, and businesses with weak contract enforceability. Royalty and revenue-share products are separate tools.
Variants: ARR-based unitranche; senior or second-lien stacks; super senior RCF plus ARR term loan; hybrids that step over to EBITDA covenants once scale is reached.
Incentives: Sponsors want speed and less dilution; lenders want yield and strong reporting; borrowers should expect more data access and tighter cash controls than a growth equity round.

Position in the capital stack and adjacent tools

Recurring revenue loans sit between venture debt and conventional EBITDA-based solutions. When EBITDA becomes steady, many borrowers refinance into cheaper unitranche loans or add a modest second lien to boost capacity. If the runway is still tight, sponsors may combine a smaller ARR term loan with preferred equity or even holdco PIK notes to reduce immediate cash burn. Intercreditor alignment matters as the stack layers on, particularly around waterfalls and enforcement.

Legal frameworks and enforceability across Europe

Most deals run on English-law LMA-style documents even for eurozone borrowers. Holdco structures are often Luxembourg or Dutch above operating companies across Europe to support treaty efficiency and enforcement at the top. Security is a mix of share pledges and asset-level collateral. In England and Wales, lenders take a debenture with fixed and floating charges. In Luxembourg and the Netherlands, share, account, and receivables pledges are standard; Luxembourg’s 2005 financial collateral law enables fast share pledge appropriation.

Civil-law jurisdictions impose constraints on upstream guarantees and financial assistance. Germany’s capital maintenance and existence-destroying interference concepts, France’s proportionality rules, and similar tests in Italy and Spain require careful obligor scoping and limitation language. IP security is feasible but registry timing is country-specific and can push perfection to post-close. Local lending license rules also matter. Some countries treat commercial lending by non-banks as regulated. Where a jurisdiction is restrictive, parties may add a fronting bank or move borrowing to a permissive holdco.

Mechanics that drive cash control and information

Capital: One or several private credit funds provide the term loan; a bank or the same fund provides a super senior RCF for working capital and LCs.
Cash waterfall: RCF interest and fees first; then senior cash interest; then principal prepayments; then any PIK interest; then amortization if scheduled; residual to borrower accounts. Some structures add a cash sweep if ARR growth misses plan.
Collateral and guarantees: All-asset security where feasible, share pledges at holding entities, bank account control where possible, and IP security in key markets. Guarantees are tailored to corporate benefit and distribution limits.
Triggers and covenants: Minimum liquidity; net or gross retention tests; maximum debt-to-ARR; sometimes a burn multiple covenant. EBITDA maintenance typically steps in only after a predefined ARR-to-EBITDA conversion point. Equity cures usually target liquidity tests.
Information rights: Monthly ARR packs with logo moves, net dollar retention, new and churned ARR, downgrades and upgrades, cohorts, deferred revenue trends, billings-to-cash, and pipeline conversion. Lenders also receive board packs and budget-to-actuals with variance drivers.
Transfers and consents: Lenders seek broad transfer rights; borrowers seek consent protections against transfers to competitors. M&A caps, add-on debt limits, pricing model change protections, and change-of-control prepayment with call premiums are common.

Documentation map and negotiation hotspots

Facilities agreement: LMA leveraged style with tailored ARR definitions, recurring revenue leverage tests, liquidity covenant, and step-over mechanics to EBITDA testing.
Intercreditor: If a separate super senior RCF is used, the agreement sets ranking, standstills, and proceeds application. See practical guidance on intercreditor agreements and lien subordination.
Security package: Debentures, share and account pledges, receivables pledges, and IP security by jurisdiction. Perfection items often land as conditions subsequent where registries delay filings.
Fees and economics: Margin grids, any PIK toggle, OID, arrangement and ticking fees, prepayment premiums, and consent fees documented in a fee letter.
Reporting backbone: Compliance certificates with standardized ARR, retention, and churn calculations reconciled to billings and cash; an ARR methodology memo that codifies adjustments for discounts, credits, free tiers, and prepayments.

Economics, fees, and a simple numeric example

Margin: Mid to high single-digit over EURIBOR or SONIA for senior unitranche, often 50-200 bps above the same credit on an EBITDA-based unitranche.
OID and fees: 1-3% OID; 50-150 bps arrangement fee; amendment fees of 25-100 bps for material changes. Call protection often steps from 3% to 1% over 2-3 years.
Tenor and amortization: Three to five years; usually bullet or light amortization; some introduce 1-5% amortization post step-over.
PIK toggles: 0-300 bps of margin may toggle to paid-in-kind under caps on consecutive periods and cumulative PIK; borrower discretion while not in default.
RCF: 5-15% of total debt as a super senior revolver, lightly utilized but important for LCs and working capital.
Warrants: Uncommon in sponsor-backed European ARR unitranche; more typical in venture debt.

Illustration: a €40 million ARR SaaS company at breakeven EBITDA raises a €20 million unitranche at EURIBOR + 700 bps, 2% OID, 1% arrangement fee, NC1 for 12 months, 48-month maturity, and a 200 bps PIK toggle cap. If 3-month EURIBOR is 3.50%, cash-pay starts at 10.50% with capacity to PIK up to 12.50% within caps. Annual cash interest is roughly €2.1 million if fully drawn with no PIK. Covenants might include €5 million minimum liquidity, net dollar retention above 105%, and debt-to-ARR below 0.6x stepping to 0.5x.

As pricing context, many investors focus on all-in returns rather than headline spreads. For a concise primer on how to interpret yield components, see this discussion of yield to maturity in private credit.

Accounting, reporting, and valuation touchpoints

Borrowers generally measure the loan at amortized cost under IFRS 9 if cash flows are solely principal and interest and the business intent is hold-to-collect. Margin step-ups tied to credit or performance can still meet SPPI if they reflect time value and credit risk. Features tied to equity-like variables may require fair value through profit or loss, so assess embedded options at inception even if uncommon.

Disclosures should cover covenants that could accelerate repayment and the risk of breach where material. Align ARR definitions in the loan documents with IFRS 15 revenue recognition to avoid reconciliation gaps. Many lenders request an ARR methodology memo and may seek auditor comfort on calculations.

Lenders that hold at amortized cost compute expected credit loss using forward-looking PD and LGD informed by ARR durability, churn, and liquidity. Funds that mark to market use fair value techniques reflecting yield movements, performance, and structural protections. Policies should address PIK capitalization and any non-performance triggers.

Tax considerations borrowers model early

Interest limitation rules under the EU Anti-Tax Avoidance Directive cap net interest deductions at 30% of tax EBITDA with a €3 million de minimis. Loss-making or low-EBITDA software companies often carry forward interest rather than deduct it immediately. Group ratio relief and carryforwards help, but the cash tax profile should be modeled up front.

Withholding tax varies. The UK withholds on yearly interest unless exemptions apply. Luxembourg typically has no WHT on arm’s length interest to nonresidents, which is why Lux holdcos are common, but transfer pricing and hybrid mismatch rules still matter. France and Italy generally do not withhold on arm’s length cross-border interest between unrelated parties, subject to anti-abuse rules. Prepare robust transfer pricing files to support above-market spreads and fees typical of ARR lending.

Regulatory and compliance outlook

Most European private credit providers are AIFs managed by authorized AIFMs. AIFMD II introduces a harmonized regime for loan-originating AIFs, including credit policies, leverage caps, and reporting. It entered into force in 2024, with national transposition running into 2026. Check fund mandates, borrower concentration limits, and reporting before scaling an ARR strategy.

KYC and AML obligations sit with the facility agent and lenders. Update beneficial ownership registers on changes of control. Sanctions screening may extend to enterprise customers if customer-level data is used during diligence and monitoring. GDPR applies if lenders receive personal data; most lenders ask for aggregated or anonymized customer data for ARR and retention testing, with data processing addenda in place.

Enforcement and restructuring playbook

These loans rely on control at the top and on cash, not on liquidation value. The primary playbook is to enforce share pledges at TopCo – often via Luxembourg appropriation or English-law security – change the board, and execute an accelerated plan. Civil-law enforcement at operating companies can be slower and more court-driven.

Restructuring tools have matured. English Part 26A plans allow cross-class cram-down. Germany’s StaRUG, the Dutch WHOA, and France’s accelerated safeguard offer preventive options. Ensure intercreditors and enforcement triggers fit these regimes, with clear consent thresholds and plan participation rights. Document super senior new-money mechanics in advance.

Key risks and edge cases to underwrite

Measurement drift: ARR can get fuzzy around paused accounts, prepayments, and usage expansions. Lock definitions and audit quarterly. Disclose all discounts and credits.
Churn and concentration: Logo or dollar churn erodes predictability; more than 10-15% ARR from one customer magnifies exposure. Look through resellers to end-customer risk.
Cash conversion: Annual billing and high deferred revenue can mask soft collections. Track billings-to-cash, DSO, and early renewals. Penalize credits and free months used to defend retention.
Burn dynamics: Burn multiple and CAC payback should support runway. If debt funds burn without efficiency gains, the company runs out of road.
Contract enforceability: Consumer exposure, freemium terms, and weak jurisdictional enforceability raise disputes. Confirm assignment and portability on enforcement or asset sales.
Security leakage: Payment processors and PSP flows can bypass pledged accounts. Map all cash pathways and secure acknowledgments.
Regulatory shifts: AIFMD II could tighten leverage or concentration for loan funds. Verify fund constraints before closing.

Comparisons and practical alternatives

EBITDA-based unitranche: Cheaper and scales better when EBITDA is steady with strong cash conversion.
Venture debt: Often includes warrants and lighter security; suits founder-led or earlier-stage companies with strong investors and smaller quantum.
ABL or receivables finance: Useful with large, clean AR pools; less effective for prepaid subscriptions.
Royalty or revenue share: Aligns with top line but can be costly and operationally heavy at scale.
Structured equity or preferred: Works when debt service capacity is thin; dilutive but pairs well with a smaller ARR loan for runway.

For broader market context and pricing drivers, see this overview of private credit market trends.

Implementation timeline and process owners

Weeks 0-2: Term sheet; lender issues ARR-focused request list; borrower prepares ARR methodology, cohorts, retention dashboards, IFRS 15 policies, and billings-to-cash.
Weeks 2-5: Legal diligence on guarantees, security, financial assistance, and registries; commercial diligence on churn, concentration, and pricing; independent ARR procedures if required.
Weeks 4-7: Documentation and intercreditor work; tax structuring for WHT and interest limits; bank account control and payment processor acknowledgments.
Weeks 6-9: Conditions precedent including board approvals, whitewash steps, KYC and AML, lien searches, filings; schedule registry items as conditions subsequent.
Weeks 8-10: Funding; set reporting cadence and KPI dashboards; embed covenant workflows and calculation agent processes.

Hard stops that should halt the deal

ARR reconciliation gaps: If ARR fails to reconcile to IFRS 15 revenue and cash, pause and fix definitions before advancing.
Retention and concentration: Net dollar retention below 100% or a customer above 20% of ARR warrants repricing, lower leverage, or a decline.
Burn risk: Burn multiple above 1.5x with no path to 1.0x in 12 months calls for sizing down or a cost plan with triggers.
Collections weakness: Material lag of cash to billings or DSO above 60 days in B2B SaaS without support means raise margin or decline.
Licensing and perfection: If unresolved in key markets, add a fronting bank, change the borrower perimeter, or walk.
Tax leakage: Interest disallowance flips NPV – switch to structured equity or hybrids.
Governance friction: If the sponsor will not provide data granularity or accept performance triggers, stop. This product depends on timely data and step-in readiness.

Drafting choices that reduce disputes

Tight ARR definition: Exclude pilots, one-time services, implementation fees, non-core SKUs, usage above committed minimums, and free or heavily discounted months. Codify treatment of credits, refunds, and promotions.
Retention math: Lock net retention and churn definitions. Require cohort-based reporting and independent data snapshots with cancellation reason coding and sales compensation checks.
Automatic regime shifts: Add cash interest step-ups if net retention falls below 100% for two quarters; mandate a cash sweep if ARR growth underperforms plan by more than 15%; step EBITDA testing forward at a defined ARR-to-EBITDA point.
Cash control: Pledge operating accounts and secure payment processor acknowledgments. Sweep daily above a working capital threshold. Bind key subsidiaries into cash pools or use pledge alternatives where pools are restricted.
Clean TopCo: Keep TopCo free of operational noise. Ensure share pledge enforceability and appropriation valuation mechanics with workable standstill periods and majority thresholds.

Fresh angle: build an ARR-to-cash early warning system

One practical improvement many teams miss is a live ARR-to-cash early warning system. Create a simple monthly heat map that compares each ARR driver to its cash analog: new ARR vs. new cash logos, churned ARR vs. refunds and credits, billings vs. collections, and deferred revenue burn vs. renewal cash. Set thresholds that automatically trigger a granular cohort review and a temporary increase in reporting cadence. This low-lift dashboard often flags softening renewal intent or overly generous discounting one to two quarters before headline retention deteriorates, buying time to resize the facility or activate pricing levers.

Closing Thoughts

Recurring revenue lending works best when contracts are enforceable, churn is low, customers are diversified, and there is a credible path to EBITDA. It competes well when equity is pricey, M&A speed matters, and market windows are uncertain. Lenders need crisp definitions, real information rights, and triggers that acknowledge how quickly ARR can change when growth slows. Sponsors should view this as senior debt priced to data dependency. Used well, it extends runway to an EBITDA-based structure without heavy dilution. Used loosely, it turns execution variability into default risk. When scale arrives, many borrowers refinance into cheaper unitranche structures and simplify covenants.