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.