The formula to calculate ARR 

The formula to calculate ARR is: Monthly Recurring Revenue (MRR) * 12

For example, if a company has 1,000 customers and every customer pays a monthly fee of €5,000 it has a MRR of €5m and an ARR of €60m. 

Whereas ARR looks at revenue yearly, MRR looks at revenue every month. 

ARR is valuable because it represents the recurring revenue that a company can count on, usually based on long-lasting contracts. It provides a more predictable and stable financial outlook.

Software-as-a-Service businesses track their ARR (and let’s assume it’s all of them) to assess their growth over time.

Increasing ARR indicates that a company is successfully acquiring new customers, expanding existing relationships, or upselling additional services. Decreasing ARR means a company loses customers due to churn or downgrading customers to less valuable contracts. 

What impacts the ARR? 

Customer acquisition

More customers mean more recurring revenue.

Churn rates

Churn means customers cancel or do not renew their subscriptions. High churn rates can hurt ARR. It reduces the total number of subscribers contributing to recurring revenue.

Expansion and upselling revenue

This includes additional revenue generated from existing customers, such as upgrades, add-ons, or increased usage of services (e.g., additional users). 

Contract length

Encouraging customers to commit to longer contract lengths can positively impact ARR. It provides more predictable revenue over an extended period.

Customer Lifetime Value

Improving the overall value derived from each customer over their lifetime can contribute to higher ARR.

When is revenue recurring? 

Recurring revenue refers to a company's income that is expected to continue and is generated through ongoing, predictable payments. This revenue model is characterized by customers making regular payments at consistent intervals, e.g., monthly, quarterly, or yearly. Unlike one-time transactions, where a customer makes a single purchase, recurring revenue models involve continuous, often subscription-based, relationships between the business and its customers.

Types of recurring revenue are

• Subscription services
• Membership fees
• Licenses renewals
• Maintenance and support contracts 
• Retainers 
• Automatic reordering

Recurring revenue is highly valued by companies since it provides them with a predictable and stable income stream. It helps companies better forecast their future revenue and plan for growth. Additionally, businesses with a significant amount of recurring revenue may be more attractive to investors, as it demonstrates customer loyalty (low churn rates) and a solid foundation for sustained financial performance.

Recurring revenue financing as alternative funding option

Classic corporate funding relies on known instruments like loans and subsidies, typically provided by established financial institutions like banks or equity and debt funds.

Usually, those traditional providers look at tangible assets (machines, real estate, vehicle fleet) and evaluate business models that are already profitable and have been operating successfully on the market for many years. 

With recurring revenue loans it’s different. It is an alternative funding instrument. Providers, usually fintechs, thoroughly assess a company's business by treating customers and revenue streams as tangible assets. Those fintechs focus on data and digitization and assess risk profiles and the future growth of SaaS companies. Usually, the underwriting models of banks are not able to do that. The business model of those kinds of tech startups operates outside their frame. 

Benefit of using recurring revenue financing

• Recurring revenue financing is completely non-dilutive: companies do not have to sell their share in return for equity. Also, there are no warrants, covenants, or personal guarantees included.
• Recurring revenue loans leave you in control: You don’t have to give up any of your ownership stakes in the company and stay in full control where your company is headed. 
• Recurring revenue financing is based on your predictable cash flow from ARR, which makes it much faster to access since you don’t have to negotiate things like company valuation. The investment decision is based on bare KPIs.

Summary: Recurring revenue financing

Recurring Revenue Financing (RRF) is a non-dilutive funding method tailored for SaaS and subscription-based businesses. It allows companies to raise debt financing based on their predictable, recurring revenues. Usually, it is calculated using Annual Recurring Revenue (ARR). Unlike traditional loans, RRF is based on forward-looking data such as customer contracts and revenue streams, making it ideal for growing companies without tangible assets. The financing terms are fixed over the repayment period. They offer stability and speed without giving up equity or control.

This model differs from revenue-based financing (RBF), where repayments are variable and tied directly to a percentage of monthly revenues. With RRF, startups can access up to a certain amount depending on ARR, and the limit grows with the business. It's particularly useful for funding predictable, ROI-driven investments like sales, marketing, or tech upgrades. Compared to equity funding, RRF is faster, more flexible, and does not dilute ownership.

Q&A: Recurring revenue financing

What is recurring revenue finance?

Recurring revenue financing (RRF) is a non-dilutive funding model that provides capital to SaaS or subscription-based companies based on their predictable, recurring revenue streams. Instead of relying on physical assets or equity, lenders assess a company’s revenue data, especially Annual Recurring Revenue (ARR), to determine how much financing they can offer. It’s fast, flexible, and founders don’t have to give up ownership.

How does ARR financing work?

ARR financing works by using a company’s Annual Recurring Revenue as the basis for a loan. For example, if your ARR is €2 million, a financing provider might offer you a percentage of that, say, up to €500,000. The loan terms are fixed (interest, repayment period), and repayments happen independently of your monthly revenue fluctuations. This gives you predictable cash without selling shares or negotiating a valuation.