ARR Reports $6 Million. The Facility Sees $2.5 Million.

The metric a company reports and the metric a facility is sized against are not the same number, and nothing in the reporting flags the difference.

Take an illustrative case. Two recurring-revenue software companies each report $6.0 million of ARR. Same monthly recurring revenue of $500,000, same gross margin, same client count, same month. Both approach the same lender for a facility against that revenue. One is offered $2.0 million. The other is offered $1.0 million.

Nothing separates them on the metric either one puts on the first slide.

What ARR describes, and what it does not

ARR annualizes the current month. It answers how large the business is running right now, which is the right question for an equity investor pricing forward growth.

A lender is asking something else: how much revenue is still owed to this company under agreements already signed. That figure is remaining contracted value, and it is a function of contract length and how far through those contracts the book currently sits.

Company A sells 12-month contracts, and the book sits on a weighted average about five months from expiry. Five months of $500,000 is $2.5 million of remaining contracted value.

Company B sells 24-month contracts, and the book averages fourteen months from expiry. Fourteen months of $500,000 is $7.0 million.

Same ARR. A $4.5 million difference in what is contractually committed.

The two tests, and the one that binds

A lender sizing a facility against recurring revenue typically runs two tests and takes the lower of them.

The first is a multiple of monthly recurring revenue. At four times MRR, both companies size to $2.0 million. On this test they are identical, which is why the opening conversation goes the same way for both.

The second is an advance against remaining contracted value. At forty percent, Company A supports $1.0 million and Company B supports $2.8 million.

Take the lower in each case. Company B is capped by the run-rate test at $2.0 million. Company A is capped by the duration test at $1.0 million.

The founder of Company A hears a headline multiple that matches the market, then receives a commitment for half of what that multiple implied. The reason sits in the contract schedule, and the contract schedule was not part of the conversation where the multiple was quoted.

Why it surfaces late

Because contract term is a sales decision, made months or years earlier for sales reasons. Twelve-month terms close faster, reduce buyer hesitation, and let a team reprice annually. Every one of those is a defensible commercial choice, and none of them was made with a facility in mind.

The consequence does not appear in monthly reporting either. ARR, growth, retention and burn multiple all read the same whether the book runs twelve months or thirty-six. Weighted average remaining term is not a number most companies compute, so the constraint stays invisible until a lender computes it during diligence.

By that point the term sheet is being drafted, and nothing about the shape of the book can change inside the four to eight weeks a facility takes to close.

What actually moves it

Contract term, at renewal, before the facility is sized.

Company A’s book turns over roughly once a year, which is the one advantage short contracts confer here. If it converts about sixty percent of that book to 24-month terms across a single renewal cycle, the weighted average remaining term moves from five months to roughly fifteen, and remaining contracted value moves from $2.5 million to $7.5 million.

At forty percent, that supports $3.0 million. The duration test stops binding, the run-rate test binds instead, and the facility reaches $2.0 million. Same ARR, same clients, same product. Twice the facility, produced by a change in the paper rather than in the business.

The trade is real and worth naming. A 24-month contract gives up the annual repricing opportunity, and buyers generally want a discount in exchange for the longer commitment. That discount has a value, and so does a million dollars of non-dilutive capacity. Most companies have never compared the two, because nothing in the ordinary course connects them.

How Thalos Capital Approaches This

Recurring Revenue Debt is structured around contracted recurring revenue rather than hard assets. An Amortized Term Facility runs three to six years for companies between $2 million and $20 million in ARR, with principal that ladders up as revenue grows. An Interest-Only Facility runs two to three years at $5 million or more in ARR, with interest-only payments and a balloon at term end. Both require a recurring-revenue technology business in the United States, at least ten clients, and gross margin above 50 percent. Neither carries dilution, board seats, or warrants.

The work that precedes the facility is building the contract schedule: term by term and expiry by expiry, so the weighted average remaining term is known before a lender computes it. Thalos Capital sizes the facility against that schedule, then takes it to the sources whose advance formula fits the shape of the book rather than to whichever source the company already knows.

A company that reports $6 million of ARR and receives an offer at $1 million has not been marked down. It has been sized accurately against a book that runs out sooner than its headline metric suggests. The number that decided the outcome was never in the reporting, and it was fully within the company’s control two renewal cycles earlier.

Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.