What is recourse?

With a full recourse loan the lender can sell the security and then pursue the deficiency, the shortfall between the outstanding debt and the sale proceeds, against your company or guarantors. With non-recourse finance the lender accepts the secured asset as its final remedy, apart from contractual exceptions such as fraud or breach of obligations. True non-recourse is rare in commercial lending and usually priced accordingly.

Limited recourse sits between the two. The lender agrees to confine recovery to specific assets (say, a plant and equipment pool), to a capped dollar amount, or to defined entities rather than individual directors. It may still contain carve-outs that reinstate recourse for fraud, wilful breach, environmental contamination, tax liabilities or insolvency proceedings. Hybrids are common: limited recourse with a time sunset, or non-recourse with carve-outs for misrepresentation or breach of covenants.

Lenders weigh recourse against credit risk, asset liquidity, regulatory capital and sector norms. Weaker borrowers prompt full recourse or personal guarantees, and illiquid or specialised assets such as custom-built plant increase recourse demands. Recourse also affects a lender's risk weighting and capital charge under the Basel framework.

It is common in SME secured lending and working capital facilities, asset finance (unless structured as vendor or captive finance with credit wraps), factoring, and some development or construction loans where cash flow is uncertain. In recourse factoring, if a customer's invoice stays unpaid the business must repurchase or reimburse the factor; non-recourse factoring transfers that credit risk to the factor, usually for a higher fee.

A registered security interest on the Personal Property Securities Register (PPSR) gives the lender priority over the secured assets, but security does not remove recourse: it defines the primary recovery route. A personal guarantee turns corporate debt into potential personal liability for the guarantor, and its drafting decides whether the lender can call on the guarantor immediately or must exhaust the asset first. Directors can also be exposed through indemnities or statutory liabilities, and a deed of cross-security spreads recourse across group entities.

On default the lender enforces its security, sells the assets and applies the proceeds. If there is a shortfall, a recourse lender can sue the borrower or guarantor for it, using statutory demands, judgment enforcement, garnishees or bankruptcy proceedings, although many prefer a restructure or payment plan to costly litigation. Secured creditors usually enforce outside a liquidation; an unsecured deficiency claim ranks behind them.

The usual levers are capped guarantees rather than unlimited ones, sunset clauses that reduce or end the guarantee after a set period or on refinance, exhaustion clauses requiring the lender to sell the collateral before calling a guarantor (which many lenders resist), and narrow carve-outs with objective triggers. Release triggers for guarantors, such as automatic release on refinancing or on meeting covenants for a sustained period, are also common asks.

Structural options include special purpose vehicles to confine exposure to project assets and intercompany deeds to limit cross-collateralisation. Red flags in documents are vague limited recourse wording, open-ended indemnities that extend liability, and cross-default provisions that spread exposure unexpectedly. Enforcement, write-offs and loan forgiveness can also trigger tax events, so legal and accounting advice before signing is essential.