Nonrecourse Debt

Nonrecourse debt – A secured loan with no personal liability.

Nonrecourse debt is secured by some form of collateral, under which the borrower has no personal liability.  If the loan defaults, then the lender only claims the collateral.  The borrower’s liability is limited to the collateral put down for the loan.  If the collateral is less than the amount still owed when the loan defaults, it is a loss for the lender.

To combat this, lenders will typically only lend a maximum of 80-90 LTV (Loan to Value) of the property used as collateral. This means that the lender will only lend a maximum of 80-90% of the value of the property being used as collateral. This way the lenders can guarantee that the property will always be worth more than the amount owed to them for the loan.

Nonrecourse debt is most commonly incurred during the financing of large commercial real estate projects that require large amounts of capital, long loan periods, and uncertain cash flows. It is crucial that a lender of nonrecourse debt be extremely familiar with the type of project that the money is being used for, along with the credit worthiness of the borrower.

Business owners can get other forms of financing without the risk of personal liability by simply establishing good business credit scores, and separating that business credit from personal credit. Business credit works just like personal credit, so paying on time to the lenders will boost up your scores.


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