Glossary - Non-recourse Financing
Non-recourse financing refers to a type of loan or financing where the lender's ability to seek repayment is limited to the collateral associated with the loan and not the broader assets of the borrower. In the event of default, the lender cannot pursue any assets of the borrower beyond the specific collateral provided for the loan.
Also known as
- Non-recourse loan
- Non-recourse debt
Use cases examples
- Real Estate Development Loan Agreement: The loan provided under this agreement is a non-recourse loan, where the lender's rights to seek repayment are limited to the proceeds from the sale of the property described herein.
- Project Finance Agreement: This non-recourse financing arrangement specifies that the creditors' recovery mechanisms are strictly confined to the cash flows generated by the project and the assets of the project company.
Considerations for investors
- Non-recourse financing limits recovery options to the collateral value, which necessitates thorough due diligence to assess the project's or collateral's viability and liquidation value.
- Investors should consider the impact of non-recourse financing on their risk profile and portfolio, recognizing that the inability to pursue additional assets may result in higher losses if the project fails.
Considerations for founders
- Founders should understand that non-recourse financing can protect personal and business assets outside of the collateral, but may come with higher interest rates due to increased lender risk.
- It is crucial to carefully define the collateral and ensure that it is not integral to the ongoing operations of the business outside of the financed project.
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