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What Are Recourse and Non-Recourse Loans?

Guest post by: Karlene Sinclair-Robinson

Article Overview: Understanding the difference between a "Recourse" and "Non-Recourse" loan is vital to every entrepreneur. Whether you are seeking financing or not, it is important to know what these terms mean and how they apply to you, the business owner. It is widely acknowledged that if you don't understand them, it can be very costly. This information just might come in handy in the future.

What Are Recourse and Non-Recourse Loans?

Merriam-Webster's Dictionary defines these two words as:

"Recourse Loans" - The right to exact payment from a party secondarily liable, where the first party has failed to pay.

"Non-Recourse Loans" - being or based on an agreement in which the lender has no right of recourse to the borrower's assets beyond stated limits.

Based on the above definitions, it is understood that "Recourse" gives the lender more guarantee that they will be repaid. They can go after any party or guarantor who signed the agreement or contract. "Non-Recourse" gets you, the borrower, off the hook for repaying the loan, in case you reach the point of being unable to pay and can clearly show evidence of this.

In most traditional financing options (bank loans), Recourse is always in place. In the non-traditional or alternative financing options (private lenders), the funder determines the use of "Recourse" vs "Non-Recourse". This is so as the private lender sets their own guidelines based on their experience and what they feel is important to them.

Recourse and Non-Recourse loans vary based on the type of financing needed and where you get the funding. They also work with the assets you have pledged in obtaining the loan. Assets such as real estate, machinery or equipment make great collateral. When the lender determines that the collateral is good enough for them, they will use a maximum loan-to-value (LTV) ratio to be able to lend you a set amount. This is all based on the value of the asset or assets you bring to the table.

You will often find in the real estate market that Non-Recourse is more widely used in the private lending sector than in the traditional forms of financing such as a bank loan. This does not mean it applies to all real estate financing transaction. This boils down to the agreement you signed. Due to the changes in the real estate financing and other private lending areas, lenders are changing the use of “Recourse” vs. “Non-Recourse” and the way they process the borrower.

These changes affect the types of documents now needed to process a loan request. More lenders are using “Recourse”, as they have been left with too many unpaid loans. With this, borrowers now have to present documents such as identification and legal status, Social Security number, on the personal side, and much more, even if you are using your company as the borrower.

What this all boils down to is this, if you receive a "Recourse" loan, the lender has every right to use all applicable methods to gain repayment. Actions the lender can take includes suing you, which then leads to judgments, and liens being levied against you. This can be on both personal and business assets. This will also affect your personal credit regardless of the loan being for your business. For the "Non-recourse" loan, you do not have the same problem as the collateral used will stand on its own. If you cannot pay it back, the lender simply takes control of the collateral pledged. They will not have the option to take you to court for the unpaid balance.

Remember, this is now the “Recourse” world of financing vs. the “Non-Recourse".

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Article Tags: assets, bank, borrower, business, business owner, entrepreneur, financing, lender, lenders, nonrecourse, nonrecourse loans, real estate, recourse, small, start up, startup, startups



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