Glossary / Funding and payment
Also known as: With recourse, without recourse, nonrecourse
Recourse and non-recourse describe who bears the loss when a payment that secures a deal is never made. With recourse, the funder can come back to you for the shortfall. Without recourse, the funder looks only to the asset and absorbs the loss.
In lending, Cornell's Legal Information Institute defines nonrecourse as "an arrangement in which the lender agrees to look exclusively to the collateral, and never to dun the borrower for a deficiency." Wikipedia's entry on nonrecourse debt contrasts recourse debt, which is "backed by both collateral from the debtor, and by personal liability of the debtor."
The same distinction applies when receivables are sold. Wikipedia's Factoring entry explains that in "without recourse" factoring the factor bears the loss if the debtor cannot pay, while "with recourse" factoring lets the factor collect unpaid amounts from the seller.
For a broker using any early-payment product, this term answers one question: if the landlord never pays the commission, do you owe the money back? Under a recourse arrangement, you do, and the cash you received behaves like debt. Under a non-recourse arrangement, the funder carries that risk, within whatever exceptions the contract lists.
Recourse also affects how the deal is classified. A Crowell & Moring client alert explains that when credit risk is allocated to the seller or guarantors, courts are more likely to treat a receivables "sale" as a secured loan. Many contracts mix the two, for example non-recourse for the landlord's failure to pay but recourse if the lease is cancelled or the broker breaches a promise. Read the specific triggers. Rules vary by state and by contract, and this is not legal advice.
List every event that would make you repay; that list, not the word "non-recourse" on the cover page, tells you how much risk you are keeping.
For example, on a hypothetical advance of $20,000 against a $25,000 commission, if the landlord goes bankrupt and pays nothing, a recourse contract could leave you owing the funder at least $20,000, while a true non-recourse contract would leave the funder with the loss.
