Recurring revenue loan (ARR loan)

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

A recurring revenue loan is a term loan sized and tested against a software or subscription business's annual recurring revenue (ARR) rather than its EBITDA, for companies reinvesting in growth with little or no profit. A business with US$40m of ARR borrowing US$60m is levered 1.5 times recurring revenue, a ratio EBITDA cannot express when EBITDA is near nil. The leverage test, often paired with a minimum liquidity covenant, runs until a flip date or condition, when the covenants convert to EBITDA terms. Most developed in US private credit, it leaves the lender reading customer retention and whether the business can become profitable before the flip.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.