Recourse vs. Non-Recourse Loans: Understanding Personal Liability
Learn the difference between recourse and non-recourse loans and how each type affects your personal liability for business debt.
What Is Recourse vs. Non-Recourse?
The distinction between recourse and non-recourse determines what a lender can pursue if you default. With recourse loans, the lender can go after your personal assets beyond the collateral. With non-recourse loans, the lender's recovery is limited to the collateral itself.
This distinction has significant implications for personal risk and liability.
Key Differences
Understanding how each type works:
| Feature | Recourse | Non-Recourse |
|---|---|---|
| Personal Liability | Yes, beyond collateral | Limited to collateral |
| Availability | Most small business loans | Larger commercial loans |
| Interest Rates | Lower | Higher |
| Underwriting | Less stringent | More stringent |
| Qualifying | Easier | Harder, larger down payments |
When Each Type Is Used
Different loan types typically fall into each category.
- Recourse: Most SBA loans, bank business loans, equipment financing
- Non-Recourse: Some large commercial real estate, CMBS loans
- Most small business loans are recourse
- Non-recourse is rare for loans under $1 million
- Even "non-recourse" may have carve-outs creating personal liability
Bad Boy Carve-Outs
Even non-recourse loans typically include "bad boy carve-outs" that trigger personal liability for:
- Fraud or misrepresentation
- Misappropriation of funds
- Environmental violations
- Failure to maintain insurance
- Voluntary bankruptcy filing
- Transfer of collateral without consent
Do not assume non-recourse means no personal risk. Review carve-out provisions carefully with your attorney before signing any loan documents.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
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