Recurring revenue loans are senior secured term loans underwritten on contracted annual recurring revenue rather than EBITDA. ARR is the annualized value of signed, renewing subscriptions or service contracts, net of cancellations and meaningful downgrades. An EBITDA flip is the planned shift from ARR-based covenants to EBITDA leverage once the business hits a scale or time milestone. For growing software and tech-enabled platforms, this approach trades a higher near-term cost for speed, flexibility, and a larger upfront check than bank lines or venture debt.
If you run a subscription business with stable cohorts but thin or negative EBITDA, recurring revenue loans buy time and capacity to keep investing. The price of that flexibility is more frequent reporting and closer lender oversight than a typical unitranche loans package. In practice, US lenders allow more leverage on ARR with looser baskets and friendlier definitions. European lenders push earlier flips to EBITDA, demand more prescriptive information rights, and often offer slightly lower spreads off lower base rates. The trade-off is simple: more cost in the US, more control in Europe.
Where RRLs Fit and Why They Matter
RRLs target SaaS, vertical software, data platforms, and managed services with multi-year agreements, high gross margins, and low churn. They come as ARR-based term loans, growth unitranches with ARR maintenance tests, or hybrids that start with ARR and flip to EBITDA later. They are not revenue-share products or asset-based lines. Underwriting centers on contract durability, cohort behavior, and collections discipline. If ARR is mismeasured, leverage headroom looks bigger than it is, which amplifies risk.
Sponsors use RRLs to finance acquisitions and growth while EBITDA lags the P&L. The payoff is speed and larger checks than venture debt, with fewer operating covenants than a bank line. Direct lenders earn higher spreads and gain better information rights than they get in covenant-lite EBITDA loans. Borrowers accept liquidity cushions, ARR quality tests, and tighter change-of-control and incurrence restrictions. The signal to your board and investors is clear: serious supervision comes with the capital.
US vs Europe: Legal Architecture That Shapes Control
US deals rely on New York law, Article 9 security interests over substantially all assets, and deposit account control agreements for cash. IP and customer contract rights fall under general intangibles. Anti-assignment clauses are addressed with proceeds liens, consent mechanics, or step-in rights where feasible. Cross-border groups add local security and guarantees with tax and corporate law limits.
European deals use English law credit agreements and LMA-style debentures with share charges and bank account security, plus local law packages for continental subsidiaries. Corporate benefit, financial assistance, and thin-cap rules limit guarantee coverage more often than in the US. Intercreditors in Europe tend to follow LMA templates. US unitranches often have no intercreditor unless there is a super senior RCF or a holdco PIK. When intercreditor issues arise, borrowers benefit from clear playbooks on intercreditor agreements to reduce execution friction.
Facilities, Draws, and Cash Flow Mechanics
Most RRLs are single-tranche unitranches with delayed-draw term loan capacity for acquisitions and capex. A small RCF may sit alongside for working capital and letters of credit. Cash waterfalls apply fees and interest first, then any scheduled amortization, and then sweeps from asset sales, insurance proceeds, and, after the flip, excess cash flow. This structure concentrates refinancing pressure if growth slows, so conservative base cases and sharper downside plans matter.
Equity cures typically address liquidity covenants. US lenders sometimes allow cures that increase ARR within covenant math. European lenders usually resist synthetic ARR cures and push cures into cash prepayments or permanent liquidity buffers. If a cure is on the table, align your board early, and study common mechanics in equity cures to avoid last-minute surprises.
Collateral, Control, and Transfer Limits
Collateral coverage usually includes all IP and material customer contracts. European lenders push more often for step-in or assignment rights on key contracts. Cash dominion in the US is tighter via control agreements; in Europe, dominion typically springs under stress. Transfer restrictions aim to keep loan-to-own buyers at bay. US documents often include blacklists, consent rights, and yank-the-bank mechanics. Europe relies more on majority lender thresholds and fronting limits. The practical outcome is higher close certainty in Europe once voting majorities are locked.
Leverage Tests and the EBITDA Flip
RRL leverage uses non-GAAP maintenance and incurrence tests aligned to revenue durability, then flips to EBITDA tests as the business scales. Four elements show up consistently, and each needs disciplined data:
- ARR leverage ratio: Total net debt divided by ARR. In the US, high-quality SaaS with net dollar retention above 110 percent and gross margins above 70 percent often supports 3.5x to 5.0x ARR. Europe typically runs at 2.5x to 4.0x ARR.
- Minimum ARR and growth: Borrowers maintain an ARR floor and often quarterly growth thresholds until EBITDA turns positive. Europe adds no-negative-net-adds tests or cohort stability screens more often.
- Liquidity covenant: Minimum unrestricted cash plus availability on the RCF. US mid-market deals size it to cover several quarters of burn. Europe hard-codes cash headroom and asks for tighter reporting, often monthly.
- Flip to EBITDA: Triggers can include de minimis EBITDA, time sunsetting at 18 to 36 months, or a size milestone. Europe flips earlier with hard dates. The US favors milestone-based flips. After the flip, leverage becomes net debt to EBITDA and excess cash flow sweeps are common.
Small modeling example: A US SaaS company at 50 million dollars of ARR and 4.0x headroom could theoretically support 200 million dollars of net debt. If NDR slips from 112 percent to 102 percent and ARR growth slows, the same loan can drift to 4.5x without new borrowings. The lesson is to model flips with buffers and test sensitivity to NDR and price churn.
Covenants and Information Rights That Actually Help
Negative covenants frame early-stage volatility and acquisition plans. US packages allow incremental facilities and sidecar growth lines with MFN and starter baskets. European packages impose absolute caps or force a re-run of the ARR leverage test with smaller baskets. US deals sometimes allow builder baskets tied to greater-of grower metrics; Europe prefers hard caps until the flip. Both require pro forma ARR compliance on tuck-ins, but Europe more often demands KPI parity for acquired ARR or uses ring-fencing with earn-outs. US documents also allow broader revenue adjustments, such as annualizing price increases and excluding certain logo churn. Europe cleaves closer to accounting policy and requests third-party validation when KPIs shift.
Monthly ARR packs are standard. Cohort analysis, logo and seat churn splits, pricing actions, collections aging, and pipeline conversion should appear every period. US lenders accept management-prepared KPI reports with audit rights. Europe more often mandates third-party ARR assurance annually or at triggers. The cost is assurance fees. The benefit is faster issue detection and fewer definitional disputes later.
Pricing, Fees, and Real-World Examples
Base rates set much of the spread math. In late November 2024, 3-month Term SOFR was about 5.35 percent while 3-month Euribor was about 3.94 percent. Proskauer data showed US all-in unitranche yields in the low to mid 12s for 3Q 2024. PitchBook LCD data placed Europe in the high single to low double digits during mid 2024. ARR loans often price at the upper ends, especially with negative EBITDA or borrower-friendly documents. Expect a 50 to 150 basis point premium to an EBITDA-based unitranche. For broader context on where credit pricing is trending, review a current private credit market outlook.
OID of 1 to 3 percent is common in both regions. Call protection typically runs 102 then 101 over two years, with make-whole in year one for riskier credits. Delayed-draw term loans carry ticking fees of roughly 50 to 100 basis points in Europe and slightly less in the US for shorter availability windows. US deals more often include a 100 to 300 basis point PIK toggle early in life. Europe allows toggles but with tighter guardrails and caps. Liquidity improves with PIK capacity, but boards should document the case and the exit path.
Illustrative economics: A US borrower with 50 million dollars of ARR raises a 175 million dollar unitranche at SOFR plus 700 basis points with a 1 percent floor, 2 percent OID, and 1 percent fees. With SOFR near 5.35 percent, the initial cash cost lands around 12 to 13 percent. A similar European RRL at Euribor plus 650 with a 0 percent floor and 1.5 percent OID sits near 10 to 11 percent. Both include 102 then 101 call protection and DDTLs with a 75 basis point ticking fee. If you need to quantify prepayment options, map scenarios using guidance on call protection and OID.
Accounting, Valuation, and Tax
Borrowers capitalize OID and fees and amortize them to interest expense under US GAAP or IFRS. With negative EBITDA, interest is typically expensed. Compliance certificates must reconcile non-GAAP ARR to billed revenue and deferred revenue movements under ASC 606 or IFRS 15. Misalignment between ARR and revenue recognition is a top driver of covenant disputes, so lock the definitional schedule before signing.
Lenders that mark to market under ASC 820 use level 3 inputs, such as pricing grids, independent valuations, and unit economics. European funds book at amortized cost or FVTPL under IFRS 9 depending on the fund’s business model. On tax, US section 163(j) caps net interest deductions at 30 percent of adjusted taxable income. With depreciation and amortization no longer added back, low-EBITDA borrowers often carry forward disallowed interest. PIK smooths cash but does not fix disallowance. In Europe, ATAD 2 imposes similar 30 percent caps with member-state wrinkles. Hybrid mismatch rules can deny deductions, and withholding needs planning. Start treaty and clearance work at term sheet to prevent closing crunch.
Regulatory and Data Compliance
US direct lenders operate as RIAs or BDCs and must meet SEC custody, valuation, and compliance rules. Borrowers must comply with Corporate Transparency Act beneficial ownership reporting at formation and on changes. In Europe, AIFMs govern many private credit funds, and marketing rules vary by jurisdiction. Sanctions and AML diligence should look through to end customers that drive ARR. GDPR matters because lenders depend on customer-level datasets. Data processing agreements and access protocols should be defined early to avoid production delays.
Risks You Can See Coming
- ARR quality: Exclude implementation fees, one-time credits, and usage-only revenue without minimums or you distort the leverage ratio.
- Churn and downgrades: A 5 to 10 percent swing in NDR can put tests offside. Require cohort reporting and logo versus seat churn splits monthly.
- Customer concentration: If top 10 customers exceed 30 percent of ARR, spring tighter reporting and trigger events when a top customer downgrades.
- Collections discipline: Extended DSOs or heavy annual prepay discounts can mask stress. Tie ARR to invoicing and enforce delinquency filters.
- Data dependency: Hardwire third-party ARR verification upon CEO or CFO turnover, auditor qualifications, or thin covenant cushions.
- Enforcement path: US Article 9 foreclosure on IP and contracts can move quickly. English share charge receivership is efficient, but multi-country operations add complexity.
Fresh angle to operationalize risk: run a three-signal dashboard every month – NDR trend, DSO trend, and top-10 concentration share. If two of three worsen for two months, you escalate to a board session and a lender update. This simple rule-of-thumb catches most problems before they hit covenants.
Alternatives and When to Switch
- Venture debt: Cheaper and lighter upfront, but smaller quantum and tighter cash covenants, often with warrants.
- EBITDA unitranche: Cheaper once EBITDA stabilizes. Many sponsors refinance at the flip or post-synergies.
- Revenue-share: Aligns with cash inflows but caps size and complicates intercreditors, which makes acquisitions harder.
- ABL: Fine where receivables or inventory exist, but pure-play SaaS rarely has eligible collateral.
- Holdco PIK: Adds flexibility above senior lenders. Understand dilution and governance in holdco PIK notes.
- Preferred equity: Useful when tax limits bite or interest shields are low. See structural trade-offs in preferred equity.
Execution Timeline and Critical Path
- Weeks 0 to 2: Indicative term sheet and exclusivity. Deliver ARR pack, logo list, top-20 cohorts, pricing history, and billing cadence. Lender drafts the ARR definition and covenant grid.
- Weeks 2 to 4: Confirmatory diligence. Lender BI team rebuilds cohorts and validates retention. Counsel drafts the credit agreement and KPI schedule. Identify consents for IP and key contracts.
- Weeks 4 to 6: Documentation convergence. Security and any intercreditor finalized, fee letter settled, compliance certificate template agreed, account control or pledges executed, and board approvals obtained.
- Weeks 6 to 8+: Conditions precedent. Foreign security perfected, filings completed, DDTL conditions set, and hedging documented via ISDA or LMA schedules.
Critical path items are consistent: ARR definition alignment, cross-border security and opinions, customer consents, intercreditor terms if a super senior RCF sits above, and tax structuring. Manage with weekly checklists.
Screening Rules That Save Time
- Non-recurring ARR: If more than 10 percent of ARR comes from implementation or usage-only without minimums, pass.
- Soft retention: If NDR is below 100 percent without a credible plan and pricing power, pass or downsize.
- Concentration risk: If top 10 exceed 40 percent of ARR or a single customer exceeds 15 percent without multi-year non-cancellable terms, require mitigants.
- Unit economics: If gross margin is below 65 percent for software or CAC payback exceeds 24 months without rapid improvement, pass.
- Data visibility: If you lack 24 months of raw cohort tables by logo for bookings, billings, collections, and churn, pause until fixed.
- Flip timing: If there is no flip to EBITDA within 24 to 36 months for a sponsor-backed platform, reprice materially or pass.
US vs Europe in Practice
Leverage is wider in the US at 3.5x to 5.0x ARR for category leaders with strong NDR and margins. Europe sits at 2.5x to 4.0x and revisits EBITDA earlier. Covenants in the US are a mix of ARR and liquidity tests with looser baskets and grower mechanics. Europe writes tighter KPIs, third-party verification triggers, and firmer flip timing with smaller, formulaic baskets. Pricing runs higher in the US mostly on base rates. Expect a 150 to 250 basis point premium on average, even when borrower profiles are similar.
Governance Moves That Work
- Define ARR tightly: Exclude non-recurring fees, limit prepayment discount treatment, and specify upsells, price increases, and ramp deals.
- Hardwire data rights: Deliver monthly customer-level datasets with fixed fields, and tie third-party verification to covenant cushions and management changes.
- Manage concentration: Spring reports and mandatory sessions when a top customer churns or downgrades, and limit concessions to top customers without consent.
- Calibrate the flip: Tie it to date and EBITDA or cash flow milestones, and require a bring-down of ARR compliance through the flip effective date.
- Align tax early: Model 163(j) and ATAD impacts, use PIK only where it supports deleveraging and tax capacity, and lock withholding relief at close.
- Pre-wire refinance: Target an EBITDA unitranche in 12 to 18 months and factor call protection into the base case to improve exit options. If needed, revisit broader trends in unitranche loans.
Closing Thoughts
Recurring revenue loans can bridge the gap between product market fit and EBITDA visibility. The structure works best when ARR is measured precisely, churn is transparent by cohort, and the flip to EBITDA is modeled conservatively. If you combine a disciplined ARR definition, monthly leading indicators, and a refinance plan, RRLs deliver the speed and scale you need without surrendering control.