ARR Still Matters. Cash Flow Now Earns the Credit.

For years, annual recurring revenue was the shorthand for software quality. ARR suggested predictability, retention, visibility, and scalability. In a low-rate market, that was often enough to support aggressive valuations and a wide range of financing options.

Recurring revenue still matters. For SaaS and enterprise software companies, it remains one of the strongest foundations a borrower can bring to a lender. But ARR is no longer the whole story. In today’s private credit market, lenders are asking what happens after the revenue comes in: can it convert into profitability and repayment capacity?

That market is evolving. Cash flow, capital efficiency, runway, retention quality, and a credible path to profitability increasingly determine whether capital is available, how much is available, and on what terms.

KBRA’s review of 189 companies with loans originally structured around ARR or recurring revenue covenants found that 31% had already produced positive credit outcomes, while 7% had negative outcomes such as default, restructuring, forbearance, or material credit amendments.¹ That spread is the point: recurring revenue can support strong credit outcomes, but only when it eventually converts into EBITDA, cash flow, and repayment capacity.

The Market Is Repricing the Risk.

Software remains a major area of focus for private credit. The Bank for International Settlements noted that outstanding private credit loans to SaaS companies grew from almost $8 billion in 2015 to more than $500 billion by the end of 2025, representing 19% of total direct loans.²

Carta’s Q1 2026 private markets data reinforces that capital is available, but increasingly concentrated. Startups on Carta raised $30.4 billion in Q1 2026, yet more than 60% of all venture capital went to AI companies.³ For non-AI SaaS companies, that concentration matters. If the next equity round is less certain, lenders will place more weight on runway, burn discipline, retention quality, and the borrower’s ability to reach profitability without depending on a perfectly timed financing market.

Venture debt also remains highly active. Runway Growth Capital and PitchBook reported that U.S. venture debt reached a record $68.8 billion in 2025, while annual deal volume remained stable at roughly 1,000 transactions.⁴

The difference is that lenders are no longer treating recurring revenue as a standalone proxy for repayment capacity. They are looking through ARR into the quality of the revenue base, the durability of customer demand, the cost of acquiring and serving customers, and the company’s ability to preserve liquidity without depending on another large equity round.

ARR Measures Momentum. Credit Requires Repayment Capacity.

Credit risk is ultimately about repayment.

The credit question is no longer simply, “How much recurring revenue does the business have?”

It is now:

Can recurring revenue become predictable gross profit?

Can predictable gross profit become operating leverage?

Can operating leverage become free cash flow before liquidity gets tight?

That progression matters because debt is less forgiving than equity. Equity can absorb volatility if the long-term upside is large enough. Debt requires a clearer view of timing, liquidity, and downside protection.

For founders, this means the financing narrative has to evolve. Growth still matters, but growth without cash discipline is less compelling than it was in the zero-interest-rate era.

SaaS Credit Now Requires AI Re-Underwriting

There is another reason ARR alone is losing explanatory power: AI is changing how lenders think about software durability.

Morgan Stanley estimates that roughly 25% of BDC portfolios are exposed to software, and that about 80% of companies in its analyzed software credit sample are private.⁵ That opacity matters. Many private software borrowers do not have the same disclosure requirements as public companies, so lenders cannot simply rely on market signals to assess whether a company is vulnerable to AI disruption or positioned to benefit from it.

The underwriting question is no longer only, “Is the revenue recurring?” It is also, “Is the product still mission-critical in an AI-native environment?” A workflow tool with shallow switching costs, weak data advantage, or limited integration depth may deserve a different credit view than an enterprise system embedded in compliance, infrastructure, or core operations.

The Best SaaS Borrowers Are Proving Durability, Not Just Scale.

In the current market, the strongest software borrowers are the companies that can prove durability across the full credit stack: recurring revenue, strong retention, disciplined burn, defensible margins, contracted cash flows, and a credible path to EBITDA. KBRA’s findings show why this distinction matters. Positive recurring revenue loan outcomes were often tied to companies scaling enough to become EBITDA-margin rich, repaying debt, reducing their cost of capital, going public, or being acquired.¹ In other words, the best ARR credits are not static ARR stories. They are transition stories from revenue predictability to cash-flow credibility.

Net revenue retention, gross retention, customer concentration, gross margin, CAC payback, sales efficiency, collections performance, and renewal behavior all matter because they reveal whether ARR is durable or cosmetic. A company with slower growth but high retention, improving margins, and a credible path to breakeven may be more financeable than a faster-growing company that needs continuous equity support to maintain momentum.

This is especially important as software markets face new questions around AI disruption, budget scrutiny, and longer enterprise buying cycles. The BIS has specifically flagged AI disruption as a growing risk factor for SaaS lending exposure, noting that concerns around traditional software business models have already contributed to software-sector valuation pressure.²

Runway Has Become a Strategic Metric.

In stronger markets, debt could be underwritten partly around the expectation that the next equity round would arrive on schedule. Today, that assumption is less reliable. Equity capital remains available, but it is more concentrated and more selective. Runway Growth Capital and PitchBook noted that 2025 venture investment remained highly concentrated in AI, with equity investors and lenders placing greater emphasis on revenue quality, capital efficiency, operating performance, and path to profitability.⁴

As a result, lenders are paying closer attention to whether the borrower can control its own timeline.

That shift is visible in lender behavior. Hercules Capital’s Q1 2026 commentary emphasized a disciplined, credit-first model amid market volatility, AI disruption fears, private credit redemption concerns, and tighter credit screens. ⁶ The signal is clear: even active venture lenders are leaning into liquidity, seniority, downside protection, and portfolio discipline.

The New Credit Premium Belongs to Cash Conversion.

Revenue quality, customer durability, margin structure, liquidity, and path to profitability are becoming central to the credit decision. For investors, this creates a clearer distinction between companies that merely look good on revenue metrics and companies that can finance themselves efficiently across cycles.

For founders, the practical takeaway is to build the financing narrative around repayment capacity, not just growth. In a market where venture dollars are increasingly concentrated in AI, software exposure is being re-underwritten, and lenders are tightening around liquidity and seniority, the companies that earn capital will be the ones that make repayment capacity visible before they need it.⁶

ARR still gets attention. Cash flow earns conviction.

About Axis Group Ventures

Axis Group Ventures is a boutique investment banking and strategic advisory firm. We focus on global debt placement and private market secondaries for venture- and private equity-backed companies. Our firm partners with founders, CFOs, and investors to provide customized capital solutions in the private markets. We leverage deep experience in private credit and a global network of capital providers. Axis Group Ventures' mission is to bring greater transparency and alignment to complex financing decisions through disciplined, independent advisory and high-touch execution. For more information, visit www.axisgroupventures.com.

Sources

1. KBRA, “Private Credit: Recurring Revenue Loans Performance Update,” June 13, 2025: https://www.kbra.com/publications/hWKjZKJQ/private-credit-recurring-revenue-loans-performance-update 

2. Bank for International Settlements, “Private credit’s software lending meets AI disruption,” March 16, 2026: https://www.bis.org/publ/qtrpdf/r_qt2603v.htm

3. Carta, “State of Private Markets: Q1 2026,” May 29, 2026: https://carta.com/data/state-of-private-markets-q1-2026/

4. Runway Growth Capital and PitchBook, “2025–2026 Venture Debt Review: Venture Debt Hits Record $68.8 Billion,” May 26, 2026: https://runwaygrowth.com/runway-growth-capital-and-pitchbook-release-2025-2026-venture-debt-review-venture-debt-hits-record-68-8-billion/

5. Morgan Stanley, “The Risks of Private Credit’s Software Exposure,” March 2, 2026: https://www.morganstanley.com/insights/podcasts/thoughts-on-the-market/private-credit-software-ai-disruption-vishy-tirupattur-vishwas-patkar

6. Hercules Capital, Q1 2026 Financial Results / Earnings Call, May 5, 2026: https://investor.htgc.com/news-events/press-releases/detail/589/hercules-capital-reports-first-quarter-2026-financial

Disclosures & Disclaimers

This blog post is provided by Axis Group Ventures for informational and educational purposes only. It does not constitute investment, legal, accounting, or tax advice, and should not be relied upon as such. Nothing contained here should be interpreted as an offer to buy or sell any securities. Any actual offer or solicitation will be made exclusively through formal documentation provided by the relevant issuer or seller.

Axis Group Ventures is not a registered broker-dealer and does not execute, negotiate, or recommend the purchase or sale of securities. Any introductions or private-market support provided by Axis Group Ventures are conducted strictly in an advisory and consulting capacity. Readers should conduct their own due diligence and consult qualified professionals before making any financial decisions.

Investments in private securities involve significant risks, including the potential loss of the entire investment, and are typically illiquid. Past performance does not guarantee future results.