Recourse vs Non-Recourse Loans: What’s the Difference?

Loans are one of the most common forms of financing for businesses. Whether you own a startup in its early stages of operation or a well-established commercial enterprise, you can finance your business with a loan. When evaluating your loan options, though, you may come across recourse loans and non-recourse loans. While they are forms of debt financing, they work in different ways.

Recourse vs Non-Recourse Loans: What’s the Difference?

What Is a Recourse Loan?

A recourse loan is a form of debt financing that allows the lender to seize the borrower’s collateral — if collateral was used to secure the loan — as well as the borrower’s assets in the event of default. Like all loans, recourse loans must be paid back. If you get a recourse loan, you’ll have to pay back the principle of the loan with interest.

They are known as “recourse loans” because they provide recourse for the lender. With a recourse loan, you are agreeing to forfeit collateral and assets if you don’t repay it. Assuming you repay a recourse loan, you’ll retain ownership of your collateral and assets. If you don’t repay it, though, the lender may seize them.

What Is a Non-Recourse Loan?

A non-recourse loan, on the other hand, is a form of debt financing in which the lender can only go after the borrower’s collateral. All non-recourse loans are considered secure. You can’t obtain a non-recourse loan without placing something of value up for collateral.

With that said, non-recourse loans shield your assets from forfeiture in the event of a default. Most borrowers have at least some assets. Assets can include stock shares, real property, fleets of vehicles, equipment and other tangible or intangible items of monetary value. Non-recourse loans protect your personal assets.

Differences Between a Recourse and Non-Recourse Loan

Recourse loans and non-recourse loans are both forms of debt financing. The only difference is that recourse loans place both your collateral and assets in jeopardy if you default, whereas non-recourse loans only affect your collateral.

Of those two types of loans, recourse loans are typically easier to obtain. This is due to the fact that they give lenders greater protection in the event of a default. You can still obtain non-recourse loans with which to finance your business, though. There are many banks and alternative lenders that offer non-recourse loans with minimal requirements.

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