Recourse vs. Non-recourse

Recourse debt is a loan or obligation where the lender has legal recourse to the borrower's personal or corporate assets beyond the specific collateral pledged — meaning if the collateral is insufficient to repay the debt, the lender can pursue the borrower's other assets for recovery. Non-recourse debt limits the lender's recovery to the specific collateral securing the loan — if the collateral is worth less than the outstanding debt, the lender absorbs the loss and cannot pursue the borrower's other assets. This distinction is fundamental in real estate finance and appears frequently in acquisition financing, seller note structures, and asset-backed lending.

In SMB acquisition financing, most SBA loans and conventional bank loans are recourse — meaning the borrower (and guarantors through personal guarantee provisions) is personally liable for the full loan amount. If the acquired business fails and is liquidated at a value below the outstanding loan balance, the lender can pursue the borrower's personal assets to collect the deficiency. This is why SBA personal guarantees create real personal financial exposure: the loan is recourse, and the personal guarantee is the mechanism for pursuing personal assets.

Non-recourse lending is most common in commercial real estate, where lenders underwrite loans based primarily on the property's cash flow and value rather than on the borrower's personal creditworthiness. A non-recourse commercial mortgage allows the borrower to walk away from the property if its value falls below the loan balance — the lender's remedy is limited to foreclosing on the property itself. Non-recourse real estate loans typically carry stricter underwriting criteria (lower LTV ratios, higher DSCR requirements) to compensate for the limited recovery option.

For M&A practitioners, the recourse/non-recourse distinction is relevant in: structuring seller notes (a seller who provides a non-recourse seller note has only the business assets as security — if the business fails, the seller cannot pursue the buyer personally); evaluating real estate included in an acquisition (the recourse nature of the mortgage affects the buyer's personal exposure); and structuring holdco/opco debt arrangements (the operational company's recourse obligations vs. the PE fund's non-recourse investment in the holdco).

Partial recourse loans are a hybrid structure where the lender has limited recourse to the borrower beyond the collateral — typically capped at a specified dollar amount or percentage of the loan. This structure is common in construction lending, where the borrower provides a completion guarantee (limited recourse during construction) that converts to non-recourse upon completion.