When seeking a Business Loan a term that you might have heard is a non recourse loan’, What exactly is it? What does it mean and how does one go about applying for one? Well let’s examine what is a Non Recourse Loan.
These are special types of loans where the borrower's financial risk is limited to the collateral that is pledged as security for the loan and nothing more. Unless between yourself and the lender something is worked out that offers the lender more than the collateral that is already securing the loan itself; then that collateral that is pledged is the only thing at risk.
This is done in a way that should the business default on the loan the lender can only go after the assets pledged as security for the loan, which is usually property. They cannot come after you and any of your personal assets. This is one of the principal reasons for the popularity of these kinds of loans.
That these loans are of limited liability and protects your assets from seizure with any financial risks should the business fail for any reason; to many appears :to be of heavenly making. As a borrower it offers peace of mind allowing you the ability to sleep soundly at night.
Another advantage is that there is easier access to the capital that the business needs, with limited personal financial constraints. As a whole with all things provided they can be easier to qualify for and most times a whole lot faster to obtain. This is mostly used by startups and companies with limited cash and limited company assets.
The first thing that you will get to know about non recourse loans is that they are priced at premium rates. Interest rates are higher than regular collateralized loans. This is so since the lenders are taking on more risk than they would normally accept, they usually charge a premium to compensate for that risk.
The lenders usually hold the principals to stricter qualification requirements also. A Bio is required of everyone with 20% or more in the company, with details of their experience and years in the intended field. Work experience is scrutinized, credit is checked and any item not seen in the best light is made to be accounted for. Often they must provide collateral with excellent value. Collateral usually being real estate.
Some lenders will insist that there will be someone of their own choosing to appoint as a member to their board. Most will require 25% or more equity in the company. The beauty of these loans is that they can be had just about anywhere that the USA has good trade relations with; both within the USA and abroad. These loans are usually issued for very large projects where the lenders seek to capitalize by large margins on their investments.
Projects that deal with Large scale building enterprises such as Apartment housing, Mining, Large scale Land Development and other such large projects are the ones most likely to interest lenders in that category. Oil, Green Energy and any other massive capital intensive venture have benefitted from some of these loans.
Some instances of non recourse loans being used is as bridge loan financing while waiting until the main loan comes through. This is also a means of funding some Business Venture Financing which might be otherwise viewed as risky. However on the flip side of this is that there are companies that have made a successful business of providing non recourse loans to some of the kinds of projects mentioned above.
To qualify for one of these types of loans you will need to get all the necessary documentation that the lenders require and be prepared to give up a good slice of equity to the lenders. It would be unfair for it not to be mentioned that your equity is released on something of a slide scale. As the loan is paid off, the lenders release their hold on the company. Once the venture is successful the borrowers will have had their startup funding and eventually a company that you can call your own free of all encumbrances. This is usually something to be worked out before all the signing is complete.