Recourse: Overview, definition, and example
What is recourse?
Recourse refers to the legal right of a lender or creditor to seek repayment or take action against a borrower or debtor if they fail to fulfill their financial obligations. In a recourse agreement, the lender has the option to pursue the borrower’s personal assets (such as bank accounts, property, or other valuables) to recover the amount owed. Recourse can apply to loans, credit agreements, or other financial transactions where the borrower’s failure to repay could result in legal action or asset seizure.
For example, if your business takes out a loan with recourse and fails to repay it, the lender can not only claim the collateral but may also pursue your business’s other assets or personal assets of the guarantors involved.
Why is recourse important?
Recourse is important because it provides protection for lenders, allowing them to recover their money if a borrower defaults on their payment obligations. It offers the lender security in case the borrower does not repay the loan or debt. For borrowers, understanding recourse terms is essential, as they may face additional financial consequences if they are unable to meet their repayment terms.
For SMBs, understanding the implications of recourse in financial agreements helps ensure that the business can manage risks associated with borrowing and ensures that creditors know their legal options in case of non-payment.
Understanding recourse through an example
Imagine your small business takes out a loan from a bank to purchase new equipment. The loan agreement includes a recourse clause, meaning that if your business fails to repay the loan, the bank can seize the equipment (the collateral) as well as pursue other assets, such as company cash or even personal assets of the business owner, depending on the agreement.
In another example, a business might provide a loan to a supplier with recourse. If the supplier defaults, the business can legally demand repayment from the supplier’s personal assets, not just the company’s assets.
An example of recourse in action
Here’s how recourse might be referenced in a loan agreement or contract:
“In the event of a default on this loan, the lender shall have recourse to all assets of the borrower, including but not limited to personal property, to recover the outstanding debt amount.”
Conclusion
Recourse refers to a creditor’s right to take legal action or seize assets to recover the money owed in the event of a default. For SMBs, understanding the concept of recourse is crucial when entering into loan agreements or credit contracts. It helps businesses evaluate their financial risks, manage borrowing effectively, and ensure they can meet their repayment obligations to avoid potential legal or financial consequences.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.