Your Biggest Customer Grew. Your Borrowing Capacity Did Not.
Recurring revenue lenders do not lend against ARR. They lend against the ARR they are prepared to count, and the largest customer is where that difference usually sits.
Lenders that underwrite recurring revenue look at how that revenue is spread. A common benchmark in the market is that no single customer should account for more than 15 to 20 percent of recurring revenue, because one departure can remove the cash flow the facility depends on.
In practice that benchmark becomes a cap. Revenue from one customer above the limit is simply not counted when the facility is sized. The company still earns it and still reports it. It just does not borrow against it.
A company with one very good customer
Take an illustrative case. A B2B software company sells workforce scheduling software to regional retailers and runs at $10 million of ARR. Its largest customer, a multi-state chain that rolled the product out across every location, pays $3.0 million a year. That is 30 percent of ARR, and the customer is happy, growing and not going anywhere.
The company approaches a recurring revenue lender for a term facility to fund product development without another equity round. The lender counts any single customer up to 20 percent of ARR. Above that, it excludes the rest.
Twenty percent of $10 million is $2.0 million. The largest customer contributes $3.0 million, so $1.0 million is not counted. Eligible ARR is $9.0 million, not $10 million.
At an illustrative sizing of 0.6 times eligible ARR, the facility is $5.4 million rather than the $6.0 million the headline ARR would suggest.
Two ways to add $2 million of ARR
Over the next year the company has two realistic paths to $12 million of ARR.
Path one: expand the largest customer. The chain adds a second module across its locations, worth another $2.0 million a year. It is the easiest sale the company will ever make: one relationship, one procurement process, a champion who already loves the product.
The largest customer is now $5.0 million of $12 million, or 42 percent. The cap is 20 percent of $12 million, which is $2.4 million, so $2.6 million is excluded. Eligible ARR rises from $9.0 million to $9.4 million. Borrowing capacity rises by $240,000.
Path two: sign two new customers at $1.0 million each. Harder sales, longer cycles, two new relationships to manage.
The largest customer stays at $3.0 million, now 25 percent of $12 million. The cap is still $2.4 million, so only $600,000 is excluded. Eligible ARR rises to $11.4 million. Borrowing capacity rises by $1.44 million.
Same new ARR, same year, same product. The second path adds six times as much borrowing capacity as the first.
Why the lender counts it this way
This is not a lender being difficult about a good customer. A facility sized on 42 percent of revenue from a single account is a facility that can lose nearly half of its cash flow in one renewal conversation, and no underwriting of retention or gross margin can offset that. The cap is how the lender keeps the facility sized to revenue that would survive the worst plausible year.
The company sees it differently, and not wrongly. The largest customer is its best customer: the most engaged, the most profitable to serve, the most likely to renew. But the facility is not measuring customer quality. It is measuring how much of the business walks out if one door closes.
What this changes before the conversation with a lender
Three things are worth knowing before a recurring revenue facility is sized.
First, the eligible number, not the headline number. A company should calculate its own concentration-adjusted ARR the way a lender will, before assuming a facility size or building a plan around it.
Second, the growth plan affects borrowing capacity, not only revenue. Expansion revenue from the largest account is valuable and should be pursued. But if borrowing capacity matters in the next twelve months, new logos move it much further than the same dollars from an existing concentration.
Third, the terms of the concentration itself are negotiable. The cap percentage, whether it is measured against total or eligible ARR, and whether a multi-year contract with the largest customer earns a higher limit all vary between lenders. A long committed contract with a creditworthy customer is a real argument for counting more of it.
How Thalos Capital Approaches This
Thalos Capital works borrower-side on recurring revenue debt for United States technology companies, through two structures: an Amortized Term Facility for companies with $2 million to $20 million of ARR, and an Interest-Only Facility for companies with $5 million of ARR and above. Both are non-dilutive.
The work starts with the ARR a lender will count rather than the ARR on the board deck: concentration, contract terms, retention and gross margin, measured on the definitions that set the facility size. That number then goes to more than one source, because concentration limits are among the terms that differ most from one lender to the next.
The company in the example did nothing wrong by growing its best customer. It just grew the one part of its revenue that no lender was going to count.
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.