Finance term
Annual Recurring Revenue (ARR)
Also known as: ARR, annual recurring revenue
Definition
ARR is the annualized value of a business's recurring subscription or contract revenue. For SaaS companies and subscription businesses, ARR is the primary revenue metric — and a key basis for revenue-based financing sizing.
Detailed explanation
ARR is calculated by taking the annualized value of all current recurring contracts. For monthly contracts, ARR = MRR × 12. For annual contracts, ARR = sum of all active annual contract values. ARR excludes one-time fees, professional services revenue, and usage-based revenue that doesn't recur predictably.
ARR is the dominant valuation metric for SaaS and subscription businesses. Investors and acquirers value subscription businesses as a multiple of ARR — typically 5x-15x ARR for high-growth software companies, lower for slower-growing or non-software subscription businesses. This ARR multiple is what makes the funding math work for many venture-backed companies.
For lending purposes, ARR is the basis for recurring-revenue financing products. Lenders specializing in SaaS advance 20-40% of ARR (sometimes higher for strong businesses), repaid monthly as a percentage of MRR. This allows companies to access non-dilutive growth capital without selling equity.
ARR should be distinguished from total annual revenue (which includes non-recurring items) and from bookings (contracts signed but not yet billing). ARR represents only the committed, currently billing recurring revenue base.
◈ Worked example
- SaaS company with 300 customers at $500/month MRR contribution each = $150,000 MRR × 12 = $1.8M ARR
- Annual contract SaaS: 50 customers on $24,000/year contracts = $1.2M ARR
- Revenue-based financing at 25% of ARR: $2M ARR → $500K advance
- ARR growth from $1M to $2M in 12 months = 100% ARR growth rate ('doubling')
Common questions
The most-asked questions about Annual Recurring Revenue (ARR) — answered straightforwardly.
What's the difference between ARR and revenue? +
ARR is the annualized value of recurring contracts only — it excludes one-time setup fees, professional services, hardware, and usage-based components. Total annual revenue includes everything. For software businesses with significant services or one-time revenue, ARR < total revenue. ARR is more predictable and valuable than non-recurring revenue.
How is ARR used in business valuations? +
Investors value subscription businesses as a multiple of ARR, ranging from 3x-5x for stable low-growth businesses to 10x-20x for high-growth software companies. The multiple depends on growth rate, net revenue retention, gross margins, and churn. Public SaaS companies' EV/ARR multiples are publicly observable and inform private company valuations.
Does ARR include contracted but not-yet-started revenue? +
Generally no. ARR should reflect currently active, billing contracts. Some businesses track 'contracted ARR' separately to include signed deals not yet live, but reported ARR typically means current billing ARR. Be consistent in definition when presenting to lenders or investors.
Further reading
This glossary entry is educational content. ClearValue Lending is a business & personal financing platform — not a lender, broker, or financial advisor. Specific product terms vary by lender; verify with the lender or issuer before applying. See privacy policy.