Lending against revenue, not assets

Traditional lenders size a loan against things they can repossess. Property, equipment, inventory, receivables. A software company has almost none of that. Its value sits in code, contracts and a customer base that does not appear on a conventional balance sheet, which is why banks have historically struggled to serve the sector and often decline to lend at all.

Revenue-based lending starts from a different asset. For a software business, the most valuable thing it owns is its stream of recurring revenue. Predictable, contracted, renewing revenue is something you can lend against, provided you understand how durable it is. The central question for a founder becomes practical rather than theoretical. Given my ARR, how much capital can I actually raise this way, and what determines the number?

The starting point: a multiple of recurring revenue

At the simplest level, the amount of capital available through revenue-based financing is expressed as a function of annual recurring revenue. The financier provides funding that the business can comfortably repay out of a modest, fixed share of its monthly revenue, over a sensible period, without limiting the cash available to operate and grow.

That framing matters. The right loan is not the largest number a spreadsheet can justify. It is the amount that can be repaid from a slice of revenue small enough to have limited impact on the business. Repayments in revenue-based financing typically run at a low single-digit percentage of monthly revenue, and the total is capped at an agreed multiple of the amount funded. Both are designed to keep the financing well within what the revenue can carry.

As a rule of thumb, the financing amount can be up to 30 percent of ARR, though where a given company sits within that range depends on the quality of its revenue and on any existing debt, including how that debt is secured and where it ranks relative to a new facility. It is a starting reference, not a formula, and the characteristics below are what move a company up or down within it.

What moves your debt capacity up

Several characteristics increase the company’s capacity to borrow against its revenue.

The first is the quality of the recurring revenue itself. Genuine subscription or contracted revenue, billed monthly or annually and renewing without a fresh purchasing decision each time, supports a larger facility than revenue that merely looks recurring. Implementation fees, one-off project work and services that must be re-won every period do not carry the same weight, because they are not dependable in the way lending requires.

The second is retention. A business that keeps its customers and grows revenue within its existing base is far better suited to debt financing than one that fills a leaking bucket. Net revenue retention above 100 percent, meaning the customer base expands in value even before new sales, is one of the strongest signals a financier can see. Independent benchmarks put median net revenue retention for many B2B software companies around 100 to 105 percent, with the best businesses meaningfully higher, and higher-value contracts tend to retain best.

The third is growth that is structural rather than circumstantial. Sustained growth driven by the product and the market supports more capital than a single strong quarter that may not repeat.

The fourth is capital efficiency. A business that converts spend into durable revenue generates the cash flow that repayments come from, so efficiency and debt capacity move together.

What holds it down, and why that protects you

Debt capacity is deliberately constrained by how much risk the structure can safely carry, and those constraints work in the borrower’s favour more than they might appear to.

The clearest discipline is loan-to-value, the size of the financing relative to the enterprise value of the business. A responsible financier keeps this low, because a modest loan against a valuable company is safe for both sides if conditions deteriorate. At Round2 Capital, the maximum loan-to-value at entry is 10 percent, and the average across our portfolio sits at 4.6 percent. That conservatism is not caution for its own sake. It is what keeps the financing manageable if a company hits a rough patch, because the repayment obligation remains small relative to the overall value of the business.

Concentration and predictability also shape the number. Revenue spread across many customers supports more capital than revenue concentrated in a handful of accounts that could each leave. Longer contract terms and stronger renewal history lift capacity, because they make the future revenue more predictable.

The result is a figure calibrated to what the business can genuinely sustain, not the maximum it could theoretically service in a perfect year. That is the point. Financing sized for the good times is a trap. Financing sized to hold up in the ordinary conditions is a tool.

A worked example of sizing

Take a business with EUR 6m in ARR, equivalent to EUR 500,000 of monthly recurring revenue, growing steadily with net revenue retention above 100 percent and a well-diversified customer base. A financier sizing revenue-based capital against this profile is not asking how large a loan the company could theoretically service in a good year. It is asking what amount can be repaid from a small share of monthly revenue while leaving enough cash available to operate and grow.

If repayments are set at a low single-digit percentage of monthly revenue, the business can comfortably carry a facility that stays within that envelope while keeping the loan small relative to the company’s enterprise value. The stronger the retention and diversification, the more the same ARR can support, because the future revenue is more certain. The weaker those qualities, the less it can support, even at the same headline ARR.

This is a different logic from venture debt, where the size and terms of the facility are often influenced by the company’s equity backing, recent funding round and cash runway, alongside its operating performance. A company with strong recurring revenue but no recent large equity raise may therefore have limited venture debt capacity and substantial revenue-based capacity, precisely because the two instruments assess risk and repayment capacity differently. That is worth knowing before assuming that a weak fit with one means a weak fit with both.

Putting a realistic range on it

The honest answer to how much you can borrow is that it depends on the quality of your revenue, not merely its size. Two companies at the same ARR can support very different amounts of capital if one has sticky, growing, well-diversified recurring revenue and the other has high churn, concentrated customers and partly non-recurring revenue.

As a rule of thumb, a growth-stage software business with strong recurring revenue and healthy retention can typically raise a meaningful multiple of its monthly recurring revenue in non-dilutive capital, sized so that repayments remain comfortably within a low share of monthly revenue and loan-to-value stays low. The way to find your own number is to look at the durability of your revenue first and the headline ARR second.

Round2 Capital sizes financing against exactly these characteristics for software companies with EUR 3m or more in ARR. If you want to understand your own debt capacity, the fastest route is a conversation about how your revenue actually behaves.