What it means
Every secured loan gives the lender a claim over a specific asset. What separates full recourse from non-recourse borrowing is what happens after that asset has been sold and the debt is still not cleared.
Under full recourse terms the unpaid balance, known as the deficiency, remains a personal or corporate obligation. The lender can sue for it, obtain judgment and enforce against bank accounts, receivables, other equipment or property.
Because the lender carries less risk, full recourse debt is usually cheaper and easier to obtain. Most ordinary business lending sits in this category: overdrafts, equipment finance, working capital facilities and the great majority of small business loans.
Lenders will often quote a rate a full percentage point below a comparable non-recourse facility for exactly this reason. The catch is concentration of risk on the borrower.
A director who signs a personal guarantee has effectively removed the protection that incorporating the business was meant to provide, at least in respect of that lender. Family homes and personal savings can end up standing behind a routine equipment facility without anyone having thought about it that way.
Non-recourse borrowing exists mainly in property, project finance and some structured lending, and it costs more precisely because the lender accepts that the asset is the whole of its security. Many agreements sit in between, described as limited recourse, where recourse applies only up to a capped amount or only if specific bad acts occur.
Reading the recourse clause before signing is therefore worth more than shaving a few basis points off the quoted rate.
In practice
Real-world examples.
Example
A haulage company finances five trucks on full recourse terms. When two are written off and the insurance settlement falls short of the outstanding balance, the finance company simply continues to invoice the business for the difference.
Example
A restaurant group's founder personally guarantees a $400,000 fit-out loan. When the second site closes, the lender recovers what it can from the kitchen equipment and pursues the founder personally for the remaining balance.
Example
A property developer negotiates a non-recourse construction loan for a single scheme, accepting an interest rate roughly 2 percentage points higher than the full recourse alternative. The premium buys certainty that a failed scheme cannot reach the rest of the group.
Formula
Calculation
Deficiency Balance = Outstanding Loan Balance - Net Proceeds from Collateral Sale
Net Proceeds = Gross Sale Price - Selling and Legal Costs
A printing business borrows against a press and later defaults with $850,000 still outstanding. The lender repossesses the press and sells it at auction for $520,000, incurring $30,000 of removal, auction and legal costs.
Net proceeds = $520,000 - $30,000 = $490,000.
Deficiency balance = $850,000 - $490,000 = $360,000.
Under full recourse terms that $360,000 remains owed by the business, and if a director signed a personal guarantee, by the director as well. Under non-recourse terms the lender would have absorbed the $360,000 shortfall and had no further claim, which is why non-recourse pricing typically carries a materially higher interest rate.Case study
Seen in the real world.
This illustrative and fictional example concerns Marlowe Press, an invented commercial printer. It bought a large-format press with an $850,000 full recourse loan, and the director signed a personal guarantee without much discussion because the rate offered was a full percentage point below the non-recourse quote.
Three years later a major contract was lost, Marlowe defaulted and the lender repossessed the press. It sold for $520,000, and after $30,000 of removal and legal costs, net proceeds of $490,000 left a deficiency of $360,000 that the lender pursued against both the company and the director personally.
The illustrative point is about pricing risk rather than blaming the lender. The one percentage point saved on the loan looked like good treasury work at the time, but it was in effect the premium Marlowe declined to pay for capping its downside at the value of the machine.
Watch out
Common mistakes.
- Believing that operating through a limited company always protects the owner, when a personal guarantee on full recourse debt sets that protection aside for the guaranteed amount.
- Assuming the collateral will cover the loan, when forced sales routinely realise far less than book value and selling costs reduce the proceeds further.
- Comparing full recourse and non-recourse offers on interest rate alone, without pricing the value of walking away from a shortfall.
Questions
People also ask.
What is a deficiency balance?
It is the amount still owed after the collateral has been sold and the net proceeds applied, and under full recourse terms the lender can enforce against other assets to recover it.
Why is full recourse debt cheaper?
The lender bears less risk because its claim is not limited to one asset, and that lower risk is reflected in a lower interest rate and easier approval.
Is most business borrowing full recourse?
Yes, ordinary bank facilities, equipment finance and small business loans are almost always full recourse, with non-recourse structures confined mainly to property and project finance.
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