Non-Recourse+

The key advantage of a non-recourse business loan is that the borrower's personal assets are protected in the event of a default. A lender can only claim the asset used as collateral to satisfy the debt, meaning the business owner's personal property, like a house or personal bank accounts, is safe.

Who is non-recourse financing for?

Any global publicly traded organization, investors and insiders. Non-recourse financing for private entities is most commonly used for large commercial real estate investments and project-based financing where the profitability of the project itself is the sole basis for repayment. For instance, a real estate developer building an office tower would typically use non-recourse financing. It is also the only type of financing allowed for real estate investments made within a Self-Directed IRA.

Non-Collateralized Loans

Defaulting on a non-collateralized business loan can lead to serious consequences like a lawsuit that exposes your personal assets due to a personal guarantee, damage to both personal and business credit scores, and owing additional costs like court fees. Even without collateral, lenders can pursue you for repayment through legal action, which can result in wage garnishment or the seizure of non-collateral personal assets like your bank account, unlike non-recourse loans. In most cases, no collateral loan limits are much less, in comparison to collaterized loans.

Non-Recourse Benefits

Protects personal assets:

In the event of a loan default, the lender is limited to seizing only the collateral specified in the loan agreement. The borrower's personal assets, such as their home, personal savings, and other real estate, are shielded from collection attempts.

Encourages riskier investments:

For certain ventures, such as commercial real estate, a non-recourse loan allows investors to take on higher risks. This is especially useful for high-capital projects with uncertain returns, as the investor's exposure is capped at the value of the collateral.

Simplifies multi-investor deals:

Non-recourse loans are less complicated for business partnerships or syndicates. With a recourse loan, investors might be hesitant to participate if their personal finances are on the line. Non-recourse financing limits liability to the business entity, making it easier to attract investors.

Increases negotiation leverage:

If a project encounters issues, a non-recourse loan can give the borrower more leverage when renegotiating with the lender. The borrower can indicate they may walk away from the property, which can make the lender more willing to compromise on new terms rather than absorb a loss through foreclosure.

Makes qualifying for future loans easier:

Recourse loans are considered a "contingent liability," a potential debt that can affect a borrower's ability to secure future financing. Non-recourse loans do not tie up a borrower's overall assets, which makes them appear less risky and more attractive to potential lenders for new projects.

Offers estate planning benefits:

For commercial real estate held in a single-asset entity like an LLC, a non-recourse loan provides a smooth transition of ownership to heirs. With a recourse loan, heirs may have to qualify for the original loan, whereas with a non-recourse loan, their personal finances are not scrutinized as long as payments are made.

Limitations to consider

While offering significant benefits, non-recourse loans are not available to all businesses and often come with trade-offs.

Stricter eligibility: Lenders typically reserve these loans for experienced investors or very strong, stable business projects, such as Class A multifamily properties. Newer businesses or investors are more likely to be offered recourse loans.
Higher lender risk: To offset the increased risk they take on, some lenders, but not all, charge higher interest rates and may require lower loan-to-value ratios on non-recourse loans.
"Bad boy" carve-outs: Certain actions like fraud or misrepresentation can trigger a "bad boy carve-out" clause, allowing the lender to pursue recourse options even if the loan was structured to be non-recourse in other circumstances.

What to consider before taking out a recourse loan

Before taking a recourse business loan, you must understand that you are personally liable for the debt, meaning the lender can seize your personal assets if the business or collateral can't cover the loan amount.

Assess your risk tolerance: Be honest about your ability to handle the personal risk involved.
Understand the loan terms: Know exactly what your personal liabilities are and what actions could trigger a recourse claim.
Loan documents: Read the loan agreement carefully to understand all the terms and conditions, as there could be specific clauses that allow the lender to pursue additional assets.