When you are searching for a loan for your business, you may come across the terms “recourse” and “non-recourse.” While you may be able to guess what they mean roughly, it can be hard to fully understand them in the context of lending. The following information will fill you in on recourse and non-recourse lending and help you to choose the right option for you.

Recourse Loans vs. Non-Recourse Loans

There are a few different meanings of recourse within lending. However, the high-level definition is that it is a loan that allows the lender to recoup the money if the borrower doesn’t live up to their obligations.

If the loan is being used to buy an asset, the lender can sell the asset and seek additional collateral from the borrower. So, if the asset doesn’t cover the full amount owed, the lender still has some recourse.

Sometimes this is used for factoring or accounts receivable lending. In this case, recourse means that the borrower can be on the hook if the customer who owes the invoice doesn’t pay the lender.

Non-recourse is, of course, the opposite of this. If the lender wants to recoup the amount owed, they can only use the collateralized asset. Anything additional will simply be a loss for the lender.

Benefits of Each

At first glance, it likely appears that non-recourse is the only way to go. However, unsurprisingly, lenders would prefer to have some recourse. Therefore, recourse loans often have better terms than non-recourse ones. They may also be easier to qualify for because the lender is taking less risk.

Conversely, non-recourse loans have one big advantage: you have some protection if you default. They are easier to plan for in the event that you are experiencing a slow sales period. If you used non-recourse factoring, you don’t have to worry as much about your customers’ reliability.

Choosing the Right Options for You

Ultimately, the decision should be based on your unique circumstances. If you are not worried about the issue of non-payment, accepting terms with recourse could help you to get a better deal. However, if you are worried, then having the non-recourse option may give you some extra peace of mind.

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Discover more about recourse and non-recourse lending today. Both options can be advantageous in different circumstances. When you know which is best for your business, you will be in a good position to borrow effectively.