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Recourse

Definition:

  1. In the context of finance and accounting, recourse refers to the legal right of a lender or a creditor to seek repayment of a loan or debt from a borrower or debtor. It provides a financial institution or creditor with the ability to recover funds in the event of default or nonpayment.
  2. Recourse also pertains to a situation where a party has the option to recover losses or damages from another party involved in a transaction, typically through legal means. It serves as a form of protection for entities engaging in commercial activities.

Usage:

1. In lending and financing:

– The bank provided a loan to the small business, but with recourse, in case the borrower failed to repay the debt.

– The creditor required the borrower to sign a promissory note, which included a recourse clause, ensuring the ability to pursue legal action in case of default.

– Investors often consider the presence of recourse as a factor in assessing the credit risk associated with a loan.

2. In commercial transactions:

– The purchase agreement included a recourse provision, safeguarding the buyer’s right to claim damages in case the seller misrepresented the product.

– When entering into a business contract, it is important to carefully consider the recourse options available for potential breaches of contract.

– The availability of recourse can provide a sense of security to parties engaging in transactions, as they know they have a legal remedy to seek compensation.

Important considerations:

  1. Recourse loans: A recourse loan is a type of loan where the lender has the right to take legal action against the borrower for any outstanding amount, even after seizing and selling any collateral provided to secure the loan. This type of loan offers lenders an additional layer of protection, increasing the likelihood of loan approval, but also places more risk on the borrower.
  2. Non-recourse loans: In contrast to recourse loans, non-recourse loans restrict the lender’s ability to go after the borrower’s personal assets in case of default. Instead, the lender’s recovery is limited to the collateral securing the loan. Such loans are common in real estate and project finance, where the underlying asset serves as the primary source of repayment.
  3. Legal implications: The presence of recourse in financial or commercial agreements has legal implications for both parties involved. It is crucial to consult with legal professionals to understand the specific rights and responsibilities associated with recourse provisions in different jurisdictions.
  4. Recourse vs. non-recourse factoring: In the realm of invoice financing, businesses often encounter the terms recourse and non-recourse factoring. Recourse factoring refers to a financing arrangement where the factor (a financial institution) has the right to demand repayment from the business if the customer fails to pay the invoice. Non-recourse factoring, on the other hand, absolves the business of any repayment obligation, putting the risk of non-payment on the factor.

Note: Recourse is a fundamental concept in finance and commerce, and its application can vary depending on the specific context and industry. Legal advice and expert consultation are recommended to fully understand its implications in different scenarios.

Synonyms:

Recovery, redress, indemnification, remediation.

Antonyms:

Non-recourse, non-liability.

Related terms:

Debt recovery, default, financial risk, legal remedy, debt collection, breaches of contract.

See also:

Collateral, loan agreement, promissory note, litigation, invoice financing.