A guide on non-recourse loans (pros and cons)
In the world of financing and loans, you have two different type of financial products – recourse loans and non-recourse (can also be spelled nonrecourse) loans. A non-recourse loan is a financial product which allows borrowing in conditions that favour the borrower instead of being more beneficial to the creditor. If you’re interested in making use of a financing option with limited liability, here’s a quick guide on non-recourse loans, their pros & cons.
Short overlook of what actually a non-recourse loan is
The difference between recourse and non-recourse financing (including non-recourse factoring) is that the latter option won’t make the borrower personally liable for defaulting or failing to meet the obligations. If a non-recourse loan is taken out but the borrower (debtor) can’t repay the lender, the debt has to be written off. Such loan contracts prevent lenders from going after other property other than the collateral which has been used to guarantee the loan.
As an example, if a company takes out a loan and puts one of its 5 buildings as a collateral, and defaults, the bank or credit institution can only foreclose on that building and nothing else, regardless they take a loss or not.
It’s time to move on to the pros and cons of non-recourse loans and factoring.
Pros of non-recourse loans
Just as we mentioned before, recourse loans, in case of defaulting, aren’t limited to your collateral obligations. If you (the borrower) fail to repay the loan, the lender can then repossess and take over other property or assets until the total obligation is met. With non-recourse factoring and non-recourse loans (or other non-recourse financial services), personal liability is arguably the biggest difference. In short, the personal assets aren’t tied in, meaning they can’t be seized.
More negotiating power
During a certain situation, if the economic or financial situations change, the debtor/the client can simply contact the lender about re-negotiation. It’s not a thing everyone likes to boast about and inform of, but in the real business world, you can just walk away without losing too much in liabilities. Banks and other financial organisations will be almost always ready to re-negotiate certain terms and work with you, in order to preserve the contract.
Easier to make arrangements
We keep mentioning factoring, loans and other non-recourse financial operations. That’s because your business will have a much easier time trying to underwrite and make deals for non-recourse loans. Besides, you can use specialised computer programmes like non-recourse factoring software and full factoring calculators with features that support non-recourse financial operation management. It’s also a huge plus, if you can integrate it with the general ledger. In addition, if you decide to take out a recourse loan or do recourse factoring, there is the prolonged process of evaluating all of the collateralised assets, too. It takes much more accounting work to do so. But, dedicated software like Soft4Factoring can help manage factoring and related management operations with pinpoint efficiency!
Better for equity investors
When joint-partnerships are in question, a recourse loan becomes super difficult to manage and overlook. The same applies general partnership or limited partnership companies. Equity investors do not love recourse loans because it, once again, adds more work to their accounting duties. Adding more liabilities isn’t something they are happy to do.
Cons of non-recourse loans
Only given to clients with great credit score
Since it offers more favourable conditions for the client, it’s also no surprise that a non-recourse loan is only a possibility for clients with great credit. Besides, it’s highly likely that such an offer will be made available to larger and more financially established businesses that have long-lasting fruitful partnerships with the creditor.
Once again, due to the fact that this service is more favourable to the client, loan companies and banks will likely offer higher interest rates and stricter overall terms. This means that if you take out multiple loans or if you’re looking for ways to optimise your finances, relying on non-recourse financing options could end up costing you tens of thousands of dollars each year. However, most businesses do appreciate more flexible terms and can overlook the stricter terms or higher interest rates.
Hard to obtain, altogether
If you’re looking for a financing option that will get your business up and running right this moment, non-recourse loans might not be the very best solution. Why? Because not all creditors are offering such a product, and if they do, just as we’ve mentioned, it’s really difficult for a business to become eligible to get such a loan. It’s much riskier for the loaner, thus they tend to limit themselves to only recourse loans and won’t even leave you with the option to choose between the two.
Obviously, non-recourse loans should and likely are favoured by a vast majority of business owners and finance managers. Due to the fact that this particular type of financing offers more flexibility to the business, it’s labelled as the preferred way of financing purchases or investments. However, due to the nature of this financing product and since it’s a higher risk for the creditor, non-recourse loans are usually expensive, hard to obtain and even so, offered to an exclusive array of clients that have great credit scores.
Thus, our advice and verdict would be to understand the situation and state that your business finds itself in. If you’re in need of financing on-the-spot and can’t afford to wait any longer until your request can be fulfilled, then look for a different solution. However, if you’re looking for the financing deal that favours you and offers you the most flexibility, stick around, send some requests to numerous financial institutions and do your best to get a quote and an offer. It’s much better for investors and your financial stability, too. Finally, once you sign the contract for a non-recourse loan, don’t forget to aid your accountants in managing it by implementing the use of dedicated loan management software!