Both recourse loans and non-recourse loans will permit lenders to seize assets from borrowers who do not repay their debts and default on their financial obligations. Legally, lenders are permitted to assume possession of any assets which have been specified as collateral so as to secure a loan. Any loan involving collateral will make it possible for the lender to seize ownership of that asset when the borrower fails to repay money owed to the lender.
The Main Difference
The biggest single difference between these two types of loans is that a recourse loan favors the lender, whereas a non-recourse loan provides more benefit to the borrower. The difference between the two comes into play when there is still an outstanding balance on the loan after collateral has been sold because the borrower failed to repay the debt. If the loan was specified as a recourse loan, the lender is legally allowed to pursue other assets owned by the borrower, so those can also be sold to make up the outstanding balance. In a non-recourse loan, lenders are prohibited from seizing any other assets owned by the borrower, even when money is still owed to the lender.
A Secondary Difference
With a recourse loan, borrowers are generally able to offer lower interest rates, because they know they can recoup their entire loan amount in the event of a default, by seizing additional assets of the borrower. That reduces their exposure and their risk of loss, so they don’t need to charge as high an interest rate as you would find on a non-recourse loan. That makes a recourse loan a little more attractive to most buyers, even though it also increases their risk of having assets seized. A borrower who has a spotty credit history would be much more likely to accept the terms of a recourse loan, even if it makes them susceptible to losing valuable assets.
Does Your Small Business Need a Loan?
Many small businesses experience cash flow issues at some point, and that’s when a small business loan can make a huge difference. Contact us at Gulf to Atlantic Commercial Capital so we can discuss some opportunities with you regarding a business loan.