Structuring ARR (Annual Recurring Revenue) loans differs from the typical banking approach for cash flow or asset backed loans.
Software companies tend to produce sticky revenue thanks to the longevity of their customer lifecycles and mission critical nature of their product.
If you are a SaaS company seeking capital, the first critical step is understanding what lenders want in exchange for an ARR loan. The following checklist takes you through the standout factors that lenders look for in SaaS companies.
What is the size of your subscription-based business?
Lenders look primarily at the size of subscription-based businesses when evaluating them for ARR loans. Most look for companies generating at least $10 million and up in ARR. This threshold shows the lender you have the scalability and cash flow they are looking for.
A smaller subset of lenders do look at <$10MM opportunities.
Do you have enterprise-class customers?
First and foremost, lenders will look at who your customers are. They favor SaaS companies with enterprise-class customers and tend to lend more for these software products.
However, if your company caters to small and medium-sized businesses, this can still be an attractive customer base. It may be a little more challenging to find the ideal lender and loan terms, but you may still have the stickiness and client quality that lenders look for in ARR scenarios.
As for consumer-based software companies, this becomes a much harder equation to solve for lenders, and you might have more options under conventional cash flow or leveraged loan structure.
Is your customer retention above 80%?
Customer retention is one of the most vital metrics lenders analyze, especially considering the preference for subscription-based models. Lenders want to see that not only do you have ongoing revenue but that you can retain your clients long-term, giving that recurring revenue a higher degree of reliability.
Anything above 80% gross retention is considered good by lenders. If you’re in the 70% to 80% range, you can likely still find a lender, but you will need to commit the necessary time and resources to understanding what’s driving your retention down.
For businesses with a retention rate below 70%, you’re much less likely to find a willing ARR lender.
Is your ARR base growing at a rate of 15% or more?
Growth is a fundamental aspect of software lending, and lenders will accept, to a certain extent, that fast-growing businesses may have negative cash flow as they prioritise growth over profitability.
When looking at growth characteristics, a good rule of thumb is that you want your business to achieve 15% or more growth in your ARR base annually. If ARR growth is below 15%, you need to have good reasons that can be clearly communicated to lenders and a well-defined path to growth.
What most lenders really want, however, are the high-growth opportunities of 20%+ annually. Companies that fall below this range can certainly still find competitive deals, but it’s important to understand that high growth is at the forefront of lending decisions in the software market and will yield the most interest and competitive terms.
What is your cash flow generation & how long can lenders tolerate cash burn?
Going hand-in-hand with business growth is cash flow generation. In many cases over recent years, software companies have been growing fast, which often leads to negative EBITDA and cash flow.
Software lenders tend to be more understanding of negative cash flow for growing companies. The key is knowing how to properly explain your company’s cash flow and how long lenders can typically tolerate cash burn. Lenders want to see that you are spending money on R&D, marketing and customer retention to grow your business.
As for the specific rate of cash burn lenders can tolerate, it can depend on each company’s specific scenario, but generally, you want to stay around 20% of revenues or lower. You must also have the liquidity to operate through the cash burn phase and the ability to demonstrate a path to positive cash flow within a finite period that is understood and agreed upon from the very beginning.
How much capital can you expect from ARR lending?
The types of lenders that engage in ARR lending fall into two buckets: commercial banks and private credit (non-bank) lenders. Commercial banks tend to lend somewhere between 1 and 1.5 times ARR, with the difference depending on their diligence and comfort with your business and ownership.
Private credit funds, on the other hand, are more willing to take risks and lend deeper into the ARR. The capital they offer often starts around the 1.5 times mark and can go up to 2.5 times the ARR, depending on the specifics of the business.
Is ARR lending the best choice for your SaaS company?
ARR lending can seem approachable, but there are many nuances to consider.
Choosing to work with an ARR lender over raising equity through the VC or PE market comes down to the cost of debt capital versus equity.
You trade off having covenants and liens on your assets in exchange for a relationship with a lender that really understands the software space and can help foster growth without having the dilutive effect on your equity capital. You also gain more opportunities to do M&A, as lenders in this space are very often open to structuring loans to enable growth through acquisitions.
Ultimately, ARR lending can be a powerful tool for SaaS companies that want to preserve equity while accelerating growth. Accepting certain covenants and a more structured framework gives you access to significantly cheaper capital and predictable financing terms.
Combined with the CAPX platform, you can find lenders who understand the recurring-revenue model deeply, allowing you to align your ongoing operations with strategic M&A flexibility that can drive sustainable growth for your business.
Think an ARR loan is right for you?
Contact CAPX today to instantly connect with the ideal lenders.
