Reasons to use recurring revenue financings

More and more special situations investors are looking at growth investment opportunities. As part of that strategy, recurring revenue financings should be considered. These are financings to businesses – typically in the technology sector or which have a SaaS business model – but where significant growth expenditures can result in low or negative EBITDA.

The terms of recurring revenue financings generally converge on the same central thesis – an acknowledgment that a borrower in this type of financing is likely generating a de minimis amount of positive cash flow while in growth mode, in exchange for an acknowledgment by the borrower that these types of financings create more credit risk than a traditional cash flow financing. 

In a recurring revenue financing, for a period of time after the closing date, a borrower will be subject to financial covenants based on recurring revenue and liquidity, and less stringent debt service requirements, in exchange for higher pricing. After one to three years, a borrower will be expected to have achieved positive EBITDA. At that time, the terms of the financing will 'flip' into more customary terms, including a total debt to EBITDA leverage covenant and a pricing stepdown.

Ropes & Gray – in both the US and Europe – has experience in these types of investments and we have prepared a primer which describes the key provisions of a recurring revenue financing for those exploring these opportunities. Please click here if you’d like more information.