Technology, Media & Healthcare

How to Underwrite a B2B SaaS Company

Underwrite a B2B SaaS company by verifying ARR at the contract level, then measuring how efficiently it grows and how well it retains. The core metrics are net revenue retention, gross revenue retention, CAC payback, and burn relative to net new ARR. Lenders size recurring revenue loans off retained ARR; equity investors pay for efficient, durable growth.

What makes b2b saas underwriting different

B2B SaaS revenue is contracted, recurring and billed in advance, which makes it unusually forecastable once you trust the ARR figure. Value comes from retention, expansion within existing accounts, high gross margins and the compounding of cohorts that renew year after year. Risk comes from inflated ARR (counting signed but not live contracts, one-time fees or usage spikes), logo churn among small customers, slowing new bookings, and heavy cash burn to sustain growth. Because the business can look healthy on bookings while cohorts quietly decay, cohort-level retention analysis is the backbone of SaaS underwriting.

Lenders underwrite B2B SaaS with recurring revenue loans or, for profitable companies, traditional EBITDA-based debt. ARR lenders care about gross retention above all, because it determines what revenue would remain if the company stopped selling and cut to profitability. They pair the loan with minimum liquidity and retention covenants. Equity investors underwrite net retention, growth efficiency and market size. They will fund burn when CAC payback is reasonable and expansion revenue is strong, but they discount companies whose growth depends on ever-larger sales and marketing spend.

Key metrics

Annual recurring revenue (ARR)

ARR is the base for valuation and recurring revenue loan sizing, so it must exclude one-time fees, services and contracts not yet live.

Net revenue retention

Captures expansion, contraction and churn in the existing base. Strong NRR means growth continues even with modest new sales.

Investors often view NRR above 100 percent as healthy and well above 110 percent as strong for mid-market and enterprise SaaS.

Gross revenue retention

Isolates churn and downgrades without upsell, showing the floor of retained revenue that supports debt.

Recurring revenue lenders commonly look for gross retention near or above 90 percent.

CAC payback period

Measures how many months of gross profit it takes to recover the cost of acquiring a customer.

Payback under roughly 18 to 24 months is often considered acceptable for B2B SaaS, with shorter expected for SMB customers.

Burn multiple

Net burn divided by net new ARR shows how much cash the company spends for each dollar of growth.

A burn multiple below about 2x is commonly viewed as efficient.

Rule of 40

Combines growth rate and profit margin to judge the balance between growth and efficiency.

Companies at or above 40 percent combined are typically considered well balanced.

Gross margin

Reflects hosting, support and onboarding costs. Low margin suggests services-heavy delivery or inefficient infrastructure.

Subscription gross margins in the 70s or higher are typical for scaled B2B SaaS.

How to underwrite it, step by step

Rebuild ARR from the contract and billing system customer by customer, excluding one-time fees, services and contracts not yet live.
Build monthly or quarterly cohort tables to calculate gross and net retention by segment and vintage.
Analyze new bookings, pipeline coverage, win rates and sales rep productivity.
Calculate CAC payback, burn multiple and contribution margin by customer segment.
Review hosting costs, support costs and implementation effort to confirm gross margin.
Assess cash runway and the cost structure needed to reach breakeven if growth slows.
Size the loan on retained ARR with liquidity covenants, or on EBITDA if the company is profitable.
Stress test for higher churn, lower new bookings and delayed price increases.

Due diligence checklist

Customer-level ARR schedule reconciled to billing and the general ledger
Cohort retention analysis by segment and vintage
Top customer contracts with renewal dates, pricing and termination terms
Bookings, pipeline and sales capacity reports from the CRM
Sales and marketing spend by channel
Deferred revenue rollforward and billing terms analysis
Hosting invoices and cloud cost breakdown
Churn reasons and customer health scores
SOC 2 report and security policies
Cash flow forecast and budget
Cap table and existing debt agreements

Key risks and mitigants

ARR overstated by non-recurring items

Reconcile ARR to invoices and contracts and apply a strict definition in the credit agreement.

Rising logo churn among smaller customers

Segment retention by customer size and size debt on the segments with proven gross retention.

Cash burn exceeds runway

Set minimum liquidity covenants, model a cost-cut path to breakeven, and limit availability to cash runway.

Slowing new bookings

Track pipeline coverage and bookings in monthly reporting and use ARR-based covenants with step-downs.

Concentration in a few enterprise accounts

Review renewal timing for the largest customers and cap their contribution to borrowing base ARR.

Competitive pricing pressure at renewal

Analyze renewal pricing history and discounting trends, and stress ARR for downgrades.

Typical financing and deal structure

B2B SaaS companies that are not yet profitable commonly use recurring revenue loans sized as a multiple of ARR, adjusted for retention and growth, with minimum liquidity and recurring revenue covenants and a scheduled conversion to EBITDA-based tests. Venture-backed companies frequently add venture debt with warrants to extend runway between equity rounds. Profitable SaaS companies use unitranche or senior term loans sized on EBITDA, often with add-backs for capitalized development disallowed by conservative lenders. Sponsor buyouts may include a mix of senior debt and preferred equity. Acquisitions of founder-owned SaaS businesses often include earnouts tied to ARR milestones, rollover equity and retention packages for key engineers and sales leaders.

Red flags

ARR that cannot be reconciled to invoices or includes signed contracts not yet billing
Net retention above 100 percent driven by price increases while logo churn rises
CAC payback lengthening every quarter while sales and marketing spend grows
Less than twelve months of runway with no committed financing
Large multi-year prepaid contracts that will not renew at the same value

Frequently asked questions

What is a good net revenue retention for SaaS?

NRR above 100 percent means existing customers expand faster than they churn or downgrade, which investors view as healthy. Many investors consider NRR well above 110 percent strong for mid-market and enterprise SaaS. SMB-focused products usually have lower NRR because small customers churn more. Underwriters review NRR alongside gross retention to understand the source of expansion.

How much can a SaaS company borrow against ARR?

Recurring revenue lenders size loans as a multiple of ARR, adjusted for gross retention, growth, burn and customer concentration. Companies with stronger retention and lower burn receive higher advance multiples. Lenders also require minimum liquidity covenants and monthly reporting on ARR and retention, and they typically expect the company to reach profitability over the loan term.

What is the difference between gross and net revenue retention?

Gross revenue retention measures how much recurring revenue a cohort keeps after churn and downgrades, excluding any expansion. It cannot exceed 100 percent. Net revenue retention adds upsell and cross-sell, so it can exceed 100 percent. Lenders focus more on gross retention as the downside floor, while equity investors value net retention as a growth driver.

What is the Rule of 40 in SaaS?

The Rule of 40 adds a SaaS company's revenue growth rate to its profit margin, often EBITDA or free cash flow margin. A combined result at or above 40 percent is commonly viewed as a good balance of growth and efficiency. It helps compare companies at different stages, though it should be read alongside retention and burn metrics.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.