Difference Between Recourse And Non-Recourse Loans

Businesses rely on capital, revenue, retained profits, and debt to expand. The majority of businesses in the United States have taken on debt at some point or the other. Recourse and non-recourse loans are two major categories of loans available for commercial use.

Recourse and non-recourse loans are secured loans which means it is pledged against a collateral. The lender can claim the assets in the event of nonpayment of the loan.

What is a recourse loan?

Recourse loans are loans secured by collateral. If the borrower isn’t able to pay back the principle as well as interest payments, the lender can claim the asset pledged as collateral as well as personal. Lenders can also sue the borrower.

Recourse loans work in favor of the lender as it gives a borrower unlimited liability. There are few limits on the assets lenders can claim against a loan’s repayment. A recourse loan reduced the risk of providing funds to a business, especially if the borrower is considered less credit worthy.

Lenders agree to recourse loans for newer businesses since they have little to no payment history. Lower interest rates are also charged to account for the unlimited liability clause of this loan. However, businesses in need of affordable debt sign up for such loans, especially if they are certain no other financing option will work out.

Recourse loans also become more common when the economic conditions of a country lean towards uncertainty.

What is a non-recourse loan?

With a recourse loan, lenders can claim the collateral if the borrowers default on payments. However, with non-recourse loans, lenders cannot claim other assets of the business. Therefore, if the value of the asset used as collateral falls below the value of the funds owed, it’s the lender’s loss that cannot be recovered.

While non-recourse loans are attractive to borrowers, they come at a cost. The interest rates levied on non-recourse loans are higher than recourse loans. Lenders tend to favor businesses that have a good credit history for such loans.

Global Capital Partners Fund provides all forms of commercial lending solutions you need. Their flexible terms, affordable interest rates, and quick processes make it a popular choice among businesses in New York. Visit their website to view their asset based financing options in New York. Call +1-800-514-7350 to speak with their representatives.

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