Benefits of Taking a Non-Recourse Commercial Loan

Owning a business means having several strategies for marketing, growing, and operating your company. One of those strategies involves how to use commercial financing to your advantage. You can use it to help grow, get yourself through a tough time, or jump on opportunities that might arise that involve needing capital.

There are several types of financing that a business could get, and they all serve different purposes. One of the fears, of course, of getting financing is the possibility that you won’t be able to keep up with payments and possibly default on them. In this case, the business will have severely damaged credit, and the owner might be held responsible as an individual. However, a non-recourse loan could be a viable option for avoiding this from happening.

What is a Non-Recourse Commercial Loan?

With a standard or recourse commercial loan, the entity borrowing the funds will have to provide a personal guarantee for the money. This means that if the business is not able to pay off its debts, the guarantor will. The guarantor is most commonly the primary business owner. That person will be responsible for any repayments and other responsibilities attached to the loan.

A non-recourse loan is one that is issued without potential personal liability. Therefore, if the business were to default on a non-recourse loan, an individual’s personal assets are protected. This means that the lender would not be able to seek repayment from an individual’s home, investments, accounts, or other assets. With a non-recourse loan, the lender is taking on more risk, since they have no safety net should the business default on the loan. The only way they will be able to recoup any of the debt would be on the money made from selling business assets. Here’s how a non-recourse commercial loan could benefit a business.

Less Liability for Business Owner

The biggest benefit is no doubt that the individual who owns the business will not be held responsible for any debt the business incurs. There is no fear of losing personal assets to make the lender whole. This means that the investor or business owner is able to take some possible risks without fear of ruining their personal lives. The business will stand alone, and the individual is protected. There are many business owners who feel that they would never need a non-recourse loan, since they will pay the debt off anyway. However, the fact is that unforeseen circumstances can happen and you could find yourself struggling with your personal assets at risk.

Allows For Higher Level Of Borrowing

When you are looking for funds for a business or to make an investment, then it’s always a benefit to be able to borrow more. You might think that since the lender has more risk, your ability to borrow would be limited, however, in some circumstances, this isn’t exactly true. The reason you may be able to borrow more is that your personal finances are separate from the business or the investment. That means that when the lender is assessing risk, they will not be looking at your personal debt-to-income ratio. As an individual, this could make you a less attractive borrower. However, your business will be judged purely on its own performance without any consideration of your personal financial situation.

Privacy

This also allows for more privacy. There may be aspects of your personal finances or situation that you don’t necessarily want to share with others, including lenders. With a non-recourse commercial loan, you don’t have to worry about that. There is no reason for any lender to request personal information of any kind.

This separation also works if you are applying for personal loans or financing. A non-recourse loan for your business does not have any bearing on your personal finances, and you will not have to declare any liabilities during your application process.

Can Simplify Partnerships

Partnerships can get complicated when it comes to owning a business or going in on an investment. A non-recourse loan can help make things simpler. With a recourse loan, you and any partners would have to decide who will provide the personal guarantee against the loan. One of you could, or some, or all. This can make things tricky, since you will have to negotiate with each of you fighting for your personal interests. Since the business or investment would stand on its own, there is no need for these situations.

Things to Remember

While you may not have personal risk or liability with a non-recourse loan, the lender is not going to leave itself completely without protection. They can still get recourse, but it will be through collateral that you and the lender have agreed upon. Plus, not every business can qualify for this type of financing, since lenders will only offer it to an entity that has a strong credit history. Before signing off on receiving this type of loan, make sure that you read your agreement thoroughly to understand all of the requirements involved.

Back To Top