What Is the Meaning of Non-Recourse?

A non-recourse loan is also referred to as a limited loan. A financial institution, such as a bank or insurance company, may enter into a non-recourse loan transaction to protect against credit risk.

Definition

A debt is a loan you must repay at the maturity date or over a set number of periods. In a non-recourse debt agreement, you provide a collateral--or financial guarantee--to a lender and the lender agrees not to seize other properties you own in case of default.

Implications

A non-recourse debt arrangement protects a lender and a borrower. For a lender, the receipt of a collateral limits loan losses if a borrower defaults. The same applies to the borrower because the debt arrangement limits losses to the collateral value in case of a bankruptcy or financial distress.

Accounting

To record a non-recourse debt agreement, debit the cash account and credit the debt payable account. In accounting terminology, debiting an asset account, such as cash or accounts receivable, means reducing the account balance. You report the non-recourse loan as short-term debt if it is due within 12 months, and as long-term debt otherwise.

References

• Investopedia: Limited Recourse Debt
• Investopedia: What is the Difference Between a Non-Recourse Loan and a Recourse Loan?