Recurring revenue finance

Recurring revenue finance lends a software or subscription business a multiple of its monthly recurring revenue, repaid in monthly instalments from that revenue. The lender looks at how much revenue renews each month and how much is lost, more than at profit. It lets a growing business borrow without selling shares, at the cost of interest and covenants tied to its revenue.

Start a funding searchFind what fits

How recurring revenue finance works

A business that sells subscriptions or multi-year contracts knows, with some confidence, what next month’s income will be. A bank lending on profit may turn it down, because a growing software company often spends heavily on product and sales and reports a loss. A recurring revenue lender looks at the income that renews: how much there is, how reliably it renews, and how much it grows each month.

The lender offers a facility sized as a multiple of your monthly recurring revenue, or a share of your annual recurring revenue. You draw it in one sum or in tranches, and repay it monthly over an agreed term, with interest. Some facilities let you draw more as your revenue grows; others are a single term loan.

Security is a debenture over the company, including its intellectual property and its customer contracts. Some lenders also take warrants, a right to buy a small number of shares later at an agreed price. Warrants cost nothing in cash but they dilute the shareholders if the company does well, so value them alongside the interest.

Recurring revenue finance is a form of revenue-based lending. Swoop’s platform covers revenue-based finance alongside loans and equity, so a funding search can show what is available against your revenue figures. See also funding for software companies.

What lenders measure

Annual recurring revenue

Subscription and contract income that renews, measured monthly and taken across a year. One-off set-up fees and services income are left out.

Churn

The share of customers, or of revenue, lost each month or each year. Lenders read it by customer group and by contract size.

Net revenue retention

Revenue this year from last year’s customers, including upgrades and lost accounts, divided by their revenue last year. Above 100% means the existing base is growing.

Cash runway

Months of cash left at the current rate of spending. A lender wants the loan repaid well before the cash runs out.

What a facility costs

Illustrative example

A software company with monthly recurring revenue of £100,000 (£1.2 million a year) borrows four times that monthly figure, repaid over 24 months. The multiple and the rate are assumptions for the arithmetic: each lender sets its own.

Facility at an assumed 4 × monthly recurring revenue
£400,000
Monthly repayment over 24 months at an assumed 12% a year
£18,829.39
Share of monthly recurring revenue going to repayments
18.8%
Total interest over the term
£51,905.33

The question for the board is what the £400,000 buys. If it pays for sales and marketing that add recurring revenue costing less to win than it brings in over the term, the borrowing pays for itself. If revenue stalls, the company is paying out nearly a fifth of its monthly revenue to the lender with no growth to show for it.

A man in a café checking a card payment on his phone

Who it suits

Recurring revenue finance suits a limited company selling software or another subscription service to businesses or consumers, with a year or more of revenue history, low churn and a clear plan for what the money will produce. It suits companies between equity rounds that want to grow without giving up more shares, or that want to reach a higher valuation before the next round.

It also suits founders who have decided against outside equity. A company growing steadily on its own revenue can use the facility to bring forward hiring or marketing it would otherwise pay for out of profits over several years.

It suits a business badly if its revenue is mainly one-off projects, if a single customer makes up a large part of its recurring revenue, or if churn is high. It also suits a business badly if the money will cover running losses with no plan to end them: the repayments start straight away and come out of the same revenue.

Recurring revenue finance or equity

Recurring revenue financeEquity investment
What you give upInterest, fees and sometimes warrantsA share of the company and some control
RepaymentMonthly, from revenueNone: investors are paid when they sell their shares
What the funder looks atRecurring revenue, churn and cash runwayThe size of the market, the team and the growth potential
SecurityA debenture over the companyShareholder rights in the articles and investment agreement
FitsPredictable revenue and a defined use of fundsLarger, riskier growth with no near-term revenue

The two can work together: a company raising venture capital or angel investment can add a revenue-based facility to reduce how much equity it sells. See how much equity to give away for the other side of the comparison.

What goes wrong

Recurring revenue facilities carry covenants tied to the measures the lender lent on: a minimum level of recurring revenue, a maximum rate of churn, a minimum cash balance or a minimum number of months of runway. Breaching one gives the lender the right to stop further drawings, raise the rate or demand repayment. Model the covenants against a bad year before you sign, and ask what happens if you breach one.

A drop in revenue hurts twice. Repayments are fixed in pounds, so they take a bigger share of a smaller income, and the covenants tighten at the same moment. Some facilities set repayments as a percentage of revenue, which flexes with it but takes longer to clear.

Directors can be asked for personal guarantees, though lenders to venture-backed companies may lend on the company’s security alone. Read what a personal guarantee means if one is requested. If the company holds research claims, an R&D tax credit loan can sit alongside a revenue facility, though the lender holding the debenture must agree.

The funding search is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000.

Questions people ask

What is recurring revenue finance?

It is a loan to a subscription or software business sized on its recurring revenue and repaid monthly from that revenue. The lender looks at recurring revenue, churn, growth and cash runway, so it can lend to a growing company that is not yet profitable. Security is a debenture over the company, and some lenders take warrants as well as interest.

How much can a SaaS company borrow against recurring revenue?

Lenders size facilities as a multiple of monthly recurring revenue or a share of annual recurring revenue, and each sets its own multiple after looking at churn, growth, gross margin and cash runway. Lower churn and steadier growth support a larger facility. One-off and services income do not count towards the figure the lender uses.

Is revenue-based finance the same as recurring revenue finance?

They overlap. Revenue-based finance is the wider term for lending repaid from a business’s revenue, sometimes as a percentage of monthly sales. Recurring revenue finance is the version for businesses with subscription or contract income, sized on that recurring revenue and repaid in instalments or as a share of revenue.

Do I need to be profitable to get recurring revenue finance?

Lenders in this market lend to loss-making companies with strong recurring revenue, low churn and enough cash runway to repay the loan. They will want a plan showing how the borrowing turns into more revenue and how the company reaches the point where it no longer needs to borrow or raise equity to run.

What are warrants in a revenue finance deal?

Warrants give the lender the right to buy a small number of shares in the future at a price set now. They cost the company nothing in cash, but if the company grows, the lender buys shares below their value and existing shareholders are diluted. Ask for the number of shares, the price and the expiry date, and value them as part of the cost of the loan.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Working capital

Business funding for software companies

Equity, recurring revenue finance and R&D tax credits, and when each suits a software business.

Read more →

Venture capital

Venture funds buy stakes in companies that could grow very large.

Read more →

Revolving credit facility

A limit you draw, repay and draw again over a fixed term, with interest only on what you use.

Read more →

R&D tax credit loans

A loan against the R&D tax relief your company expects to receive, repaid when the claim is paid.

Read more →
All business funding

Start a funding search

Start a funding search

Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

Request a meeting