Glossary Term

Recourse

What is Recourse?

Recourse refers to a lender’s legal right to pursue a borrower’s personal or business assets in addition to the collateral pledged for the loan if the borrower defaults. In a recourse loan, the borrower is personally liable for repaying the loan, even if the value of the collateral is insufficient to cover the debt. This provides lenders with a higher level of security and accountability.

How Recourse Works

Recourse provisions are outlined in the loan agreement and specify the extent to which the lender can seek repayment. Key features include:

  • Collateral Requirements: The loan is secured by specific assets, such as real estate or equipment, which the lender can seize in case of default.
  • Personal Liability: If the collateral does not fully cover the loan amount, the lender can pursue additional assets, such as savings, investments, or other property, to recover the remaining balance.
  • Legal Action: In some cases, lenders may take legal action to enforce the recourse provision and recover their losses.

    • Recourse vs. Non-Recourse Loans

    The primary distinction between recourse and non-recourse loans lies in the borrower’s liability:

  • Recourse Loans: Borrowers are personally liable for the full loan amount. If the collateral’s value falls short, lenders can pursue additional assets.
  • Non-Recourse Loans: Borrowers are not personally liable beyond the value of the collateral. If the collateral is insufficient, the lender absorbs the loss.

    • Benefits of Recourse Loans

    Recourse loans can offer advantages for borrowers, especially in certain scenarios:

  • Lower Interest Rates: The additional security provided by recourse reduces the lender’s risk, often resulting in more favorable interest rates.
  • Easier Qualification: Lenders may be more willing to approve loans with recourse provisions, especially for borrowers with limited credit history or high-risk projects.

    • Challenges of Recourse Loans

    Borrowers should carefully evaluate the risks associated with recourse loans:

  • Personal Asset Risk: The lender can seize personal or business assets beyond the collateral, increasing financial exposure.
  • Legal and Financial Strain: Defaulting on a recourse loan can result in lawsuits or significant financial loss.
  • Market Volatility: If collateral values decline, the borrower remains liable for the shortfall.

    • Tips for Managing Recourse Loans

    To mitigate the risks of recourse loans:

  • Thoroughly review loan agreements to understand the extent of personal liability.
  • Maintain sufficient reserves or insurance to cover potential shortfalls in collateral value.
  • Work with experienced lenders to explore options for reducing personal exposure, such as limiting the recourse provision.

    • Recourse Loans and LYNK Capital

    At LYNK Capital, we offer loan options tailored to the needs of real estate investors and developers. Our team works closely with borrowers to ensure they fully understand loan terms and select the financing structure that best suits their goals. Contact us today to learn more about our flexible lending solutions.

     
     
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    *LYNK Capital Fund, L.P. operates as LYNK Investments, LLC in the state of Texas.
    LYNK Capital offers fix & flip loans, new construction loans, bridge loans, and DSCR rental loans to real estate investors.
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    Private Lending Glossary - Recourse