A recurring revenue loan is a first-lien credit facility sized against predictable subscription renewals rather than EBITDA. Lenders anchor on annual recurring revenue or monthly recurring revenue, then stress-test how long customers stay and how profitable they are. If you are financing a SaaS, managed-service, or other subscription business near breakeven, this is the tool to convert revenue visibility into growth capital.
In practice, recurring revenue loans give sponsors time to scale while preserving equity. The payoff is speed and meaningful proceeds, provided data is clean and definitions are crisp. The tradeoff is tighter early-warning covenants and strong cash control to preserve downside protection.
Align sponsor and lender aims early to speed closing
The fastest paths to closing start with explicit alignment on goals at term sheet. Sponsors want quick certainty, high proceeds against ARR, and room to reach profitability. Lenders want unambiguous definitions, proof of retention and gross margin, visibility into cash, and tripwires that trigger early. By stating those aims up front, you shorten negotiations and reduce covenant surprises.
Set a shared data plan during the term sheet phase. Identify the billing system and CRM as systems of record, the snapshot date for ARR measurement, the reconciliation to GAAP revenue, and the monthly KPI package. This clarity de-risks diligence and compresses the timeline.
Metrics that drive sizing and covenants
Definitional discipline is the gate to capacity. Tie every inclusion and exclusion to fields the company can produce monthly and auditors can test. When definitions are tight, covenants can be both objective and actionable.
- ARR and MRR: Define ARR as the annualized value of contracted subscription revenue at a point in time, excluding one-time fees and usage unless priced as a minimum. Most facilities compute ARR as MRR times 12, net of credits, discounts, and promo months. Month-to-month contracts should count only if they auto-renew and exhibit stickiness. Prepaids count in ARR, even if cash timing shifts.
- Retention: Track gross revenue retention (GRR) and net revenue retention (NRR) consistently. Strip out migrations and M&A noise. Tie GRR and NRR from the billing system to GAAP revenue and deferred revenue under ASC 606 or IFRS 15, so investor and lender reporting match.
- Churn and contraction: Separate dollar churn and logo churn. Cap dollar churn over a rolling period and disallow improvements driven solely by temporary price increases.
- Cohort and concentration: Recognize that seasoned cohorts behave differently than new ones. Cap top-customer ARR concentration with stepped relief for investment-grade names to mitigate revenue cliff risk.
- Margin and cash conversion: Prioritize subscription gross margin and contribution margin over GAAP operating margin at this stage. Use burn multiple (net burn divided by net new ARR) and simple payback as growth efficiency screens, not default triggers unless audit-ready.
- Contract quality: Favor minimum terms, auto-renewal with proven behavior, and parental guarantees for enterprise subsidiaries. Flag termination-for-convenience and permissive concessions as fragility risks.
- Revenue mix: Carve out services, usage, and hardware pass-through unless contractual minimums and history justify a conservative haircut-based inclusion.
Map ARR to GAAP cleanly for credibility
Because ARR is non-GAAP, make reconciliations transparent and consistent. Provide bridges from ARR and MRR to recognized revenue and deferred revenue. Follow SEC non-GAAP guidance by avoiding adjustments that confuse rather than clarify. A one-page rule of thumb: anything you cannot explain to your audit partner in two sentences does not belong in ARR.
As a fresh best practice, many borrowers now run a quarterly ARR assurance review with agreed-upon procedures by their auditors. This “light-touch audit” surfaces gaps early and builds lender confidence without the cost of a full audit.
Sizing and structures that match the path to profitability
Size to ARR, not EBITDA. There are two complementary ways to frame capacity, and lenders often use both.
- Loan-to-ARR: Set capacity as X times ARR, calibrated to cohort durability, growth efficiency, gross margin, and liquidity runway. Younger or more volatile cohorts justify lower X.
- Debt/ARR test: Maintain total debt divided by ARR at or below Y, tested quarterly. This keeps leverage in check as the base evolves.
Plan the covenant transition as the business matures. When the borrower reaches sustained profitability, shift from ARR-based to EBITDA-based tests in steps, not a cliff. Tie pricing ratchets to that glidepath for smoother refinance optics.
Common structures include unitranche term loans with delayed draws, a split collateral stack with a revolver, or a senior opco facility paired with a smaller holdco PIK toggle for sponsor flexibility. A six-week close is realistic with prepared data. For broader market context on pricing and call provisions, see discussions of call protection and unitranche loans.
Covenants that trigger early, not late
Design early-warning tests around definitions that management cannot change mid-quarter. The goal is to prompt a course correction while options remain open.
- Minimum liquidity: Set a hard-dollar cash floor and, if a revolver exists, a minimum undrawn balance. Count only cash in controlled accounts.
- Debt-to-ARR or minimum ARR: Cap Debt/ARR or require minimum ARR that steps up over time. Size the cushion to absorb a full-quarter shortfall in net new ARR. A 15-25 percent buffer is a practical starting point in year one.
- Retention and churn triggers: Use NRR floors or churn caps as incurrence blockers on extra debt or acquisitions when measurement complexity is high. Reserve defaults for simpler, harder-to-game tests.
- Burn runway: Measure months to zero cash using trailing burn, not forecasts. If runway falls below a threshold, tighter restrictions should spring automatically.
- Growth guardrails: Add caps on net new go-to-market hires or marketing spend as a percent of ARR to pause inefficient growth until payback improves.
Reset mechanics that preserve early-warning value
Resets keep covenants relevant through acquisitions, pricing shifts, currency moves, and profitability transitions. Done well, they remain objective and balanced.
- Triggers: Limit to objective events such as closed acquisitions above a threshold, broad-based pricing changes, material multi-currency translation moves, or sustained EBITDA positivity.
- Initiation: Let borrowers request a limited number of resets per year, with a revised compliance certificate and KPI pack. Require majority-lender consent for material changes; allow auto-resets only for FX within bands.
- Mechanics: Rebase tests to a defined percentage of the updated base case while preserving minimum cushion. If Debt/ARR loosens post-acquisition, tighten minimum liquidity or reduce delayed-draw availability for a period to keep risk balanced.
- Evidence: Require billing-system extracts, tie-outs to GAAP revenue and deferred revenue, and, for larger facilities, an agreed-upon procedures report on ARR and retention.
- Economics: Charge a modest reset fee and implement a temporary margin step-up or undrawn reduction if a reset occurs shortly after closing.
Collateral, cash control, and jurisdictional protections
These are standard first-lien secured loans with no special-purpose vehicle. The familiar security package applies, with extra attention on IP and cash.
- Collateral and guarantees: Take first-priority security on substantially all assets, including IP, equity, receivables, deposit accounts, and intercompany claims. Perfect under UCC Article 9 in the U.S. and local equivalents in the UK or EU.
- Cash control: Implement DACAs or blocked accounts on material accounts. Set cash dominion triggers tied to covenant breaches or going-concern risk.
- Contract rights: Rely on general security and negative pledge protections because customer contract assignments are often restricted, especially under non-U.S. laws.
- IP and data: Perfect liens over IP and record with the patent and trademark offices. Check for existing venture debt liens to avoid priority disputes.
Documentation and reporting that avoid disputes
Most novelty sits in the definitions and reporting. Spell out how recurring revenue is calculated to reduce gray areas and audit pain later.
- Credit agreement: Define recurring revenue at the SKU level. Include churn and retention calculation details and timing. Attach exhibit samples for ARR and NRR calculations.
- Security and intercreditor: Use standard U.S. security agreements, IP filings, UK debentures or local equivalents, DACAs, and intercompany subordination. If a revolver sits alongside the term loan, include a first-lien intercreditor with a clear waterfall that prioritizes refunds tied to deferred revenue.
- Reporting: Deliver a monthly KPI pack with ARR/MRR bridges by cohort, churn and expansion detail, GRR/NRR, average contract term, logo counts, concentration, pipeline conversion, gross margin, burn multiple, and deferred revenue. Tie monthly KPIs to quarterly compliance certificates with officer sign-off.
- System-of-record: Name the billing system and CRM, require notice and consent for changes, and lock in a snapshot date for testing alignment.
Economics, pricing, and fees sponsors should expect
RRLs typically price above same-size EBITDA loans because underwriting depends on data quality rather than historical cash flow. Lenders will charge for the added work and volatility risk.
- Upfront costs: Expect arrangement fees, original issue discount, admin fees, and ticking fees on delayed draws. Closing fees around 1-3 percent all-in are common.
- Call protection: Use soft call premiums that step down over time. Undrawn fees and sunset dates on delayed draws reinforce discipline.
- Margin ratchets: Step down pricing on NRR, ARR growth, or EBITDA transition, with verification rights and clawbacks if later audits restate KPIs.
- Earnouts: Define earnout treatment and cap deferred consideration to avoid leverage surprises after closing.
Accounting and tax touchpoints to plan early
Accounting for the loan itself is straightforward. The complexity lives in metric reporting and disclosures.
- Accounting: Book the loan at amortized cost. Reconcile non-GAAP metrics to GAAP revenue under ASC 606 or IFRS 15, and keep adjustments consistent and well described.
- Tax: Model interest deductibility limits such as U.S. section 163(j) and UK CIR. In cross-border structures, account for withholding tax, treaty relief, and anti-hybrid rules. Ensure intercompany guarantees and cash sweeps are priced at arm’s length.
Compliance overlays that keep the deal clean
Compliance is standard but should not be an afterthought. Baking requirements into reps and covenants avoids scramble at closing.
- KYC/AML/sanctions: Close with complete KYC and refresh screening after material borrower changes.
- Beneficial ownership: U.S. borrowers should comply with FinCEN BOI filings and maintain notice covenants for changes.
- Adviser rules: Private credit managers and sponsors must follow SEC and European AIFMD or UK rules for information sharing and recordkeeping.
Practical risk guardrails that prevent surprises
Most problems start with fuzzy definitions or weak data governance, not day-one interest coverage. Put guardrails where they matter.
- Metric inflation: Exclude promotional months and count price changes only at renewal. Ring-fence usage unless backed by contractual minimums and proven history.
- Data integrity: Reconcile billing, CRM, and revenue recognition monthly. Allow lenders sample-level extracts and periodic integrity checks. In larger deals, use agreed-upon procedures.
- Cash slippage: Keep DACAs tight and monitor for new accounts.
- Customer behavior shifts: Watch logo churn and pipeline-to-book conversion. Use early triggers that flag procurement changes before renewals slip.
- Deferred revenue stress: Size liquidity for potential refunds and codify refund priority in the waterfall.
Alternatives when an RRL is not the best fit
Consider adjacent tools when ARR is volatile, cohorts are young, or capital needs are niche.
- Venture debt: Often cheaper early but smaller checks and more warrants.
- Revenue-based financing: Aligns with cash generation but can constrain operating flexibility.
- Asset-based lending: Useful where receivables are meaningful, though thin for most SaaS.
- Convertibles or preferred: Dilutive but flexible when ARR trends are uncertain; explore preferred equity if governance rights are acceptable.
- Holdco PIK: Preserves operating company flexibility at a higher cost; see holdco PIK structures for use cases.
- Mezzanine debt: Adds a cushion beneath senior lenders and can be combined with RRLs; compare economics on mezzanine debt.
Execution timeline and ownership that keep momentum
With a clear plan, a six-week close is achievable. Assign owners and anticipate blockers to avoid drift.
- Week 0-1: Align on the ARR framework, covenant philosophy, reporting cadence, reset rights, and M&A pipeline.
- Week 1-3: Run diligence on contracts, cohorts, billing extracts, and ARR/NRR computations. Build a 24+ month KPI room. Scope auditor procedures if needed.
- Week 3-5: Negotiate definitions, covenants, security, intercreditor, and reporting exhibits. Finalize reset mechanics and cure rights. Launch DACAs.
- Week 5-6: Complete perfection certificates, any foreign filings, board approvals, opinions, officer’s certificates, compliance templates, and the initial KPI pack. Activate cash controls before first draw.
Ownership should be explicit. Sponsor finance teams own metric production and GAAP tie-outs. Borrower counsel owns precise definitions and consent rights. Lender counsel owns security, covenants, and resets. The agent sets reporting timetables and enforces information rights. Auditors backstop ARR integrity with procedures tailored to the KPI set.
Negotiation plays that trade flexibility for control
The best trades give lenders more visibility while giving sponsors levers to grow.
- Data for capacity: Offer deeper reporting and read-only data access in exchange for higher Debt/ARR or wider cushions.
- Objective resets: Anchor resets to objective events and FX bands; avoid plan-based resets that re-bake tests each budget cycle.
- Staged transition: Stage the shift to EBITDA tests with a dated schedule and matching pricing ratchets.
- Targeted caps: Accept tighter limits on concentration or churn to secure broader M&A baskets where growth relies on consolidation.
Lender non-negotiables to respect
Certain protections are must-haves for private credit approval committees. Building them in early saves time.
- Cash and IP control: Perfected and effective at close, including DACAs and IP filings.
- Audit-ready KPIs: For larger facilities, price steps and covenant tests should rely only on metrics robust enough to survive audit procedures.
- Reset friction: Modest fees and pairings that make resets rare and purposeful.
- Early-warning tests: Anchor to liquidity and leverage-to-ARR, not vanity KPIs.
Closing Thoughts
Recurring revenue loans let sponsors finance pre-EBITDA businesses on sticky customers and strong margins. They work best when ARR is defined tightly, cash is locked down, and covenants provide early signals. Sponsors should arrive with clean data and trade transparency for flexibility. Lenders should keep definitions crisp, reset rules objective, and pricing calibrated to metric volatility. That balance funds durable growth and protects the downside across cycles, including US vs Europe variations in leverage, covenants, and pricing that you can benchmark using comparative RRL frameworks.