What it means
Every secured loan has collateral, which is an asset the lender can seize and sell if the borrower stops paying. The question is what happens when that sale does not cover the debt.
With full recourse, the lender can go after the borrower's bank accounts, other property and income to recover what is still owed. This matters because it decides who carries the risk of a fall in asset values.
In a full recourse loan, the borrower carries it, since a drop in the value of the collateral does not reduce what they owe. In a non-recourse loan, the lender carries it, which is why lenders usually charge more for non-recourse borrowing and lend a smaller share of the asset's value.
Full recourse is common in many small business loans, where the owner is asked to sign a personal guarantee. It also appears in receivables finance and factoring, where a business sells its invoices to a finance company but has to buy back any that the customers fail to pay.
The business receives cash early, but the bad debt risk stays with it. For accounting purposes, recourse can change how a transaction is recorded.
If the seller of receivables keeps the risk of non-payment, the transaction may be treated as a secured borrowing rather than a true sale, so the receivables remain on the balance sheet. Finance teams should always read the recourse terms before they decide how to present such deals.
A nuance is that the deficiency does not always get collected in practice. Rules on recourse differ between places and types of loan, and chasing a borrower with no remaining assets may cost more than it recovers.
Even so, the legal right to pursue the borrower is what gives full recourse lenders their comfort.
In practice
Real-world examples.
Example
A bakery owner takes a loan to buy a new oven and signs a full recourse agreement. When sales fall and the business closes, the oven fetches far less than the balance owed. The lender pursues the owner for the remaining balance rather than writing it off.
Example
A wholesaler sells $300,000 of unpaid customer invoices to a finance company on full recourse terms. One customer fails to pay a $40,000 invoice, and the finance company requires the wholesaler to buy it back. The wholesaler's credit loss was never really transferred.
Example
A property investor chooses a full recourse mortgage to get a lower interest rate on a rental building. She understands that if rents collapse, the bank can claim against her other assets as well as the building. She sets aside reserves to protect herself.
Formula
Calculation
Deficiency owed by the borrower = amount owed - net proceeds from selling the collateral
Suppose a business borrows $200,000 against a piece of equipment and, after repaying part of it, still owes $180,000. The borrower defaults, and the lender sells the equipment for $130,000, with $5,000 of selling costs. Net proceeds = 130,000 - 5,000 = $125,000. Deficiency = 180,000 - 125,000 = $55,000. Under full recourse, the borrower still owes the lender $55,000; under non-recourse, the lender would absorb that $55,000 as a loss.Case study
Seen in the real world.
Redstone Print Works is an illustrative, fictional printing company that borrowed $500,000 to buy a new press. The lender offered two versions: a non-recourse loan at a higher interest rate, or a full recourse loan at a lower one.
The owner chose full recourse because the saving on interest was worth several thousand dollars per year, and she was confident in her order book. Then a major customer went bankrupt, and sales dropped by a third within a year.
The press was eventually sold for much less than the balance owed, and the lender pursued the company for the deficiency. In this illustrative story, the lower rate turned out to be the price of keeping all the downside risk, and the owner now compares the interest saving with the worst-case shortfall before she signs.
Watch out
Common mistakes.
- Assuming that losing the collateral clears the debt, when under full recourse the borrower can still owe a large balance after the sale.
- Choosing full recourse purely because the interest rate is lower, without working out how much extra risk is being carried in exchange.
- Treating a sale of receivables on recourse terms as a clean sale in the accounts, when the seller still holds the risk of non-payment.
Questions
People also ask.
What is the difference between full recourse and limited recourse?
Under full recourse the lender can claim against all of the borrower's assets, while limited recourse restricts the claim to specified assets or a capped amount.
Why would a borrower accept full recourse?
It usually comes with a lower interest rate, a higher loan amount or easier approval, because the lender faces less risk.
Does a personal guarantee make a company loan full recourse?
In effect it does, because the guarantor becomes personally liable for any shortfall that the company cannot pay.
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