What Is the Difference Between Recourse and Non-Recourse Financing?
Recourse and non-recourse loans are both financial tools used by business owners to fund their company needs. The main difference between these two loan types has to do with the collateral used to secure the loan. Collateral is often required by lenders and can include the asset being financed, other business assets or even personal assets of the business owner. The type of loan you have will determine how much of this collateral is at stake should you default on your loan. Here are the main differences between recourse and non-recourse lending.
Recourse loans, which in general are more favored by lenders, allow banks greater freedom to pursue other business and personal assets if the value of the collateral sold does not equal the debt owed. For example if you have financed a large piece of machinery and cannot make payments, but the current value of that machinery does not cover the remaining balance of the loan, the lender can then claim other assets to cover the difference. While this type of lending seems to be a greater risk for borrowers, it is easier to come by and can make funding possible for those otherwise deemed unworthy because of poor credit or other factors.
With a non-recourse loan, lenders are restricted to only the collateral put forth to secure the loan. This means that if there is still a debt balance after all allowed collateral is sold, the lender will have to take that difference as a loss. Using the same machinery example from before, in this case the lender would not be able to touch anything else should selling the machine not garner enough to cover the loan. Of course non-recourse-lending is generally preferred by borrowers because it leaves other business and personal assets safe, but this type of financing is much harder to come by. Borrowers usually need a very high credit scores to qualify. It’s also worth noting that these loans can come with higher interest rates because of the increased risk for the lender.
Now that you know the difference between recourse and non-recourse loans you are on your way to deciding of one of these financial tools is right for your business. While recourse loans pose a greater risk to other assets, they are easier to come by. Non-course loans are harder to come by and come with higher interest rates, but offer more protection for the borrower. Both recourse and non-recourse lending are viable options to help your business with its financial borrowing needs.