A recourse loan is a loan that provides the personal guarantee of the person borrowing the money or the person(s) behind the entity borrowing the money. Recourse can benefit the borrower in that if they feel confident about putting their personal name and personal assets behind the loan, they can sometimes achieve better loan terms. However, more often than not, recourse is required when a borrower or borrowing entity is not strong enough on its own, or if the property itself doesn't fall into a category that makes it conventional. Traditionally, for example, hard money loans, are full recourse. Either way recourse allows greater security for the entity lending the money.

With recourse loans, in the event of a default, in any capacity, usually in the form of falling behind on loan payments, the lender can seek financial damages from the borrower directly, so that if the investor does take a loss on the property it can go after the borrower individually for the balance of the money owed. This can include repossessing personal property, or even garnishing wages from a borrower’s bank account.

The main advantage of a recourse loan is that lenders will often view the personal guarantee as their confidence in repaying the loan amount, and are more willing to provide better terms on the note. This can be beneficial to savvy borrowers since they can get better terms on the loan.

Another advantage of a recourse loan is that it can enable an investor to borrow more than they would be able to with a non-recourse loan. This is because the debt isn’t tied to the borrower’s income or total assets — as they are involved in recourse financing. With recourse debt, banks and other lenders can place a cap on how much debt they can accept, relative to an investor’s personal income.

Finally, recourse loans can be significantly less complicated for a syndication or partnership. Consider the challenges of non-recourse financing in such a situation: Let’s say three investors pool their resources to finance the acquisition of a shopping center. With a recourse loan, all three investors can be held liable for the loan, which can make it easier to secure financing.

The main disadvantage of a recourse loan is that the borrower or borrowers must personally guarantee the funding amount against their own assets. This means that if the borrower defaults on the loan, lenders can seek financial damages from the borrowers directly. This can be a risk for borrowers who are not financially strong enough on their own, or if the property itself doesn't fall into a category that makes it conventional. Additionally, recourse loans may not offer the same terms as non-recourse loans, such as lower interest rates or higher loan amounts relative to the property value.

For more information, please see the following sources:

• Is Non-Recourse Financing Right for You?
• What are Recourse Loans?

Recourse loans require the personal guarantee of the person borrowing the money or the person(s) behind the entity borrowing the money. This means that if the borrower defaults on the loan, lenders can seek financial damages from the borrowers directly. This can include repossessing personal property, or even garnishing wages from a borrower’s bank account.

Recourse loans can be beneficial to savvy borrowers since lenders will often view the personal guarantee as their confidence in repaying the loan amount, and are more willing to provide better terms on the note. However, recourse is more commonly required when a borrower or borrowing entity is not financially strong enough on its own, or if the property itself doesn't fall into a category that makes it conventional. Traditionally, for example, hard money loans are full recourse.

Recourse loans are loans that require the borrower or borrowers to personally guarantee the funding amount against their own assets. This ensures that should the borrower default on the loan, lenders can seek financial damages from the borrowers directly. Recourse loans can be beneficial to savvy borrowers since lenders will often view the personal guarantee as their confidence in repaying the loan amount, and are more willing to provide better terms on the note.

The two main types of recourse loans are conventional loans and non-conventional loans. Conventional loans are typically used for more stable assets, such as multifamily properties, while non-conventional loans are used for more risky assets, such as hotels or other commercial properties.

Sources: Recourse vs. Nonrecourse Commercial Loans and What are Recourse Loans?

When taking out a recourse loan, it is important to understand the potential liabilities that could arise. Recourse loans are typically more risky for borrowers, as lenders may pursue a borrower’s personal assets in the event of default. This means that if the collateral is insufficient to cover the outstanding loan amount, a lender could attempt to recover losses by going after a borrower’s personal assets, including wages. It is therefore essential that borrowers understand their personal liability and exposure when taking out a recourse loan. Additionally, borrowers should be aware that certain activities, such as fraud or misrepresentation of financial strength, could trigger a bad boy carve-out, which would allow the lender to pursue recourse options. Knowing the potential liabilities associated with a recourse loan is critical for any borrower looking to explore their commercial real estate finance options.