When is recurring revenue borrowable?
The candidates identify themselves on the income statement rather than the balance sheet: software, subscription services, and contracted business-to-business services, where the value sits in a stream that renews rather than in machines or accumulated earnings. The trigger is usually growth capital at a point where the earnings line is thin by strategy, and the owner would rather not sell equity to fund what the revenue already predicts.
What makes a stream borrowable is durability, not size. Retention measured at cohort level, gross margin that survives the cost of serving the revenue, contract terms that hold for a defined period, and customer concentration inside limits a lender will accept. A business growing quickly on revenue that churns quickly is a harder credit than a slower one that keeps what it wins, and lenders in this market read the second number first.
The boundary is worth stating plainly, because it decides whether this page is relevant at all. These instruments serve companies earlier and smaller than conventional leveraged structures and they price accordingly. As earnings emerge and stabilize, the same business usually finances more cheaply against them, and part of the advice is saying when that moment has arrived rather than renewing the expensive facility once more.
Revenue share, ARR facility, or venture debt?
Three lender classes share this vocabulary and sell materially different things. Revenue-based financing funds take a fixed share of monthly revenue until a repayment cap is met, with no fixed schedule and no interest rate on the face of the deal. Specialist recurring-revenue lenders and direct lenders running annual-recurring-revenue facilities write term debt sized off the contracted stream, with an amortization schedule, covenants, and a rate. Venture lenders underwrite the investor syndicate rather than the revenue, which is a different product again and is covered on its own page.
Sorting a borrower between them comes before approaching anyone, because the words do not distinguish them and the economics do. A fixed revenue share flexes with the business and costs the most when the business does well. A term facility fixes the cost and the schedule and then tests the company against covenants it has to operate inside. Neither is better in the abstract. They hand the borrower different risks, and the decision is which risk the business is built to carry.
Facilities written against annual recurring revenue carry one feature worth understanding before the term sheet rather than after it: conversion covenants that switch the structure from revenue-based tests to earnings-based tests as the company scales (market convention). A borrower who signs for the early flexibility and never models the conversion has agreed to a covenant package it has not read.
What does a repayment cap actually cost?
A revenue-based facility quotes a multiple, not a rate: repay 1.25 times what was advanced, or 1.5 times, or more, out of an agreed share of monthly revenue. On the published market shape, revenue shares often run 5% to 15% of monthly revenue against total repayment caps of 1.5x to 3.0x the funding amount (Re:cap, revenue-based financing guide, 28 August 2026), while one US lender's own statistics put the common factor range at 1.15x to 1.65x with a median near 1.35x and remittance rates of 2% to 10% of monthly gross revenue (Crestmont Capital, Allan Garfinkle, 28 March 2026).
The multiple is fixed. The time is not, and that is where the cost actually lives. The same cap repaid faster compresses an unchanged dollar cost into fewer months and raises the effective annualized rate. A lender's own published conversion makes the point: a 1.25x factor repaid over twelve months converts to roughly a 45% effective annual rate, and the same 1.25x factor repaid over eighteen months to roughly 30%, with the range across repayment speeds running 18% to 75% (Crestmont Capital, Allan Garfinkle, 28 March 2026).
Read the direction of that arithmetic carefully, because it is counterintuitive and parts of this market state it backwards. A company that beats its plan repays sooner and pays the higher rate, precisely because it did well. The method we apply is to project the repayment schedule three ways, base, downside, and flat, take the monthly internal rate of return, annualize it, and set the result against the dilution the facility avoids. A cost expressed as a multiple cannot be compared with a loan until somebody has converted it.
What do recurring-revenue lenders test?
The durability of the stream, measured rather than described. Retention and churn at cohort level, gross margin, contract length and renewal behaviour, and customer concentration. The evidence is systems-level revenue data and cohort tables rather than a summary slide, because the facility is effectively secured on the reliability of that reporting.
The billing data is therefore part of the credit rather than an input to it. A business that cannot produce clean cohort and billing data on demand finds that preparation, not the metrics inside it, is the constraint on the facility. The diligence file in this market is a database, which is a genuinely different preparation task from the earnings bridge a leveraged credit wants or the appraisal an equipment lender wants.
Then the definitions, which carry the whole structure. What counts as recurring, how churn is measured, and what happens when a contract renegotiates decide how the facility behaves for its entire life. Documentation is lighter than a leveraged credit agreement, and the temptation to treat it as a formality is exactly why those definitions end up disputed at the worst possible moment.