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Non-Recourse Loan

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 7, 2022

A Non-recourse loan is a loan where the borrower cannot be held liable for any losses or defaults on the loan. The lender has no recourse against the borrower for any amount owed (excluding security); therefore, they will only ever recover what is covered by collateral/security.

Non-recourse loans are usually issued to companies and individuals for large asset purchases, such as machinery and real estate. Non-recourse financing is attractive to the borrower because it involves much less risk than other types of loans.

Recourse vs Non-Recourse Loan

A Recourse Loan is a type of financing involving an agreement by which the lender has recourse to the borrower’s general credit, person, and property. In the event of a default or breach of contract, the lender may have recourse to all or part of these three elements. 

Non-recourse loans are usually issued to companies and individuals for large asset purchases (i.e., machinery and real estate) – in order to avoid making a loan which they would have to take back if the borrower defaults. 

Non-recourse financing is attractive to the borrower because it involves much less risk than other types of loans, but also significantly higher interest rates.

Non-Recourse Loan Benefits

Non-Recourse Loans are ideal for large asset purchases due to the fact that lenders will only ever recover value of the security in case an asset is not performing as planned. Non-Recourse Loans are also preferable to traditional loans when borrowers meet the following conditions: 

1) Non-recourse financing limits borrower liability 

2) Non-recourse financing allows for the use of assets as collateral 

3) Non-recourse financing provides greater flexibility when repaying loans

Who Can Apply for Non-Recourse Loan?

Non-recourse loans are usually issued to companies and individuals for large asset purchases (i.e., machinery and real estate) in order to avoid making a loan which they would have to take back if the borrower defaults. 

Non-recourse financing is attractive to the borrower because it involves much less risk than other types of loans, but also significantly higher interest rates. 

Non-recourse loans usually follow certain criteria as well as a clear lending process that requires approval from several different parties. Non-Recourse Loans are ideal for large asset purchases due to the fact that lenders will only ever recover value of the security in case an asset is not performing as planned.

How to Qualify for Non-Recourse Loan? 

Non-recourse loans are usually issued to companies and individuals for large asset purchases, such as machinery and real estate.

Non-recourse financing is attractive to the borrower because it involves much less risk than other types of loans, but also significantly higher interest rates. 

Non-recourse loans usually follow certain criteria as well as a clear lending process that requires approval from several different parties. 

It is ideal for large asset purchases due to the fact that lenders will only ever recover the value of the security in case an asset is not performing as planned.

Process of Filing for Non-Recourse Loan

The Non-Recourse Lending Process typically involves the following steps:

Process_of_Filing_for_Non-Recourse_Loan

Step One

The Non-Recourse Lender must conduct a detailed underwriting process in order to determine that issuer will be able to finance the borrower based on its future performance.

Step Two

The Non-Recourse Lender approves the initial loan documents and negotiates the specifics of the security instrument with the borrower.

Step Three

Non-Recourse Loan Transaction is reviewed and approved by Non-Recourse Lender’s internal credit, legal and compliance departments as well as outside counsel.

Step Four

Non-Recourse Loan Transaction is reviewed for final documentation. 

Step Five

Non-Recourse Loan Transaction is submitted for approval to the appropriate Non-Recourse Lender’s committee or board. 

Step Six

Non-Recourse Loan Transaction is closed.

Elements of Filing for Non-Recourse Loan

The Non-Recourse Lending Process typically involves the following elements:

  • Non-Recourse Lender performs due diligence to assess risk
  • Completion of loan documents by Non-Recourse Lender and Borrower 
  • Non-Recourse Loan is originated 
  • Non-Recourse Lender secures Non-Recourse Loan with collateral
  • Non-Recourse Lender disburses Non-Recourse Loan
  • Maintenance of Non-Recourse Lender’s interest in the Non-Recourse Loan through regular payments and compliance with all conditions to closing.

Risks of Non-Recourse Loan

Non-Recourse Loans usually follow certain criteria as well as a clear lending process that requires approval from several different parties.

Non-Recourse Loans are easy, quick, and efficient, but it is important to remember that they do not allow for debt restructuring in case of an economic crisis. They are well suited for large asset purchases such as machinery and real estate.

Here are some of the risks involved in Non-recourse loans:

  1. Non-recourse loans are typically larger transactions. It is important to get a Non-recourse lender that has the ability and willingness to fund such a transaction.
  2. Non-recourse lenders require cash flow in order to maintain Non-Recourse Loans. 
  3. Non-Recourse Lenders will only ever recover the value of the security in case an asset is not performing as planned.
  4. Non-recourse loans do not allow for debt restructuring in case of an economic crisis and thus Non-Recourse Lenders are typically stricter when it comes to Non-recourse loan qualifications.
  5. Non-recourse loans are easy, quick, and efficient but Non-recourse lenders require strict compliance with all conditions to closing. Non-Recourse Loan Application 
  6. Applicants can qualify for Non-Recourse Loans in many cases by showing strong financials and cash flow. 

Key Takeaways 

Non-recourse loans can be used for large assets like machinery and real estate. Non-recourse loans are easy, quick, and efficient but Non-recourse lenders require strict compliance with all conditions to closing. 

Applicants can qualify for Non-Recourse Loans in many cases by showing strong financials and cash flow. 

Non-Recourse loans are debt instruments that take the form of either an asset-based loan, a mezzanine debt, or preferred equity.
Applicants can qualify for Non-Recourse Loans in many cases by showing strong financials and cash flow.
Non-Recourse loans access higher capital at lower costs. Non-Recourse lending is a process that allows Non-recourse lenders to get more money out of their assets and helps borrowers get funding for assets such as real estate.
Non-Recourse Lenders have little to no risk if Non-recourse loans are structured correctly. Non-Recourse Loans are called non-recourse because Non-recourse lenders are not legally entitled to pursue other assets you own.
Some Non-Recourse loans are backed by assets such as real estate, which allow Non-recourse lenders to be secured. Non-recourse lending is a process that allows Non-recourse lenders to recover more of their investment.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.