What is Non-Recourse Financing?

Non-recourse financing is a lending arrangement in which the lender cannot access the borrower 's assets in order to obtain payment, other than any designated collateral . An example of non-recourse financing is a mortgage , where the lender can only sell the underlying home to obtain repayment of the loan . If there is a remaining balance on the mortgage after the home has been sold to repay it, the lender will have to write it off.

Advantages of Non-Recourse Financing

The advantage of using non-recourse financing lies entirely on the side of the borrower. From this party’s perspective, a non-recourse arrangement is ideal, since there is no way for the lender to attach the borrower’s assets if the borrower defaults on a loan. Instead, the borrower can preserve assets for later use as collateral on other loans, if the need arises.

Disadvantages of Non-Recourse Financing

Since the potential sources of repayment funds are reduced, this type of financing presents a relatively high risk of loss for lenders. Consequently, non-recourse financing is generally only available to larger entities with strong operating cash flows . Given the higher risk of nonpayment, the interest rates associated with this type of financing tend to be high.

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