So you’ve built an amazing money making business but now you are a little stuck. You’ve come to a dead end and are in need of funding to grow even more. Now comes everyone’s least favorite part. The hunt for the funds. In this article we are going to talk about different kinds of loans with a focus on non-recourse loans.
After those first few google searches, you start to see a few different common loan types mentioned. There are secured loans and unsecured loans. Unsecured loans are loan types often with higher interest rates because of the fact that no collateral is required. It’s a higher risk type of loan. Secured loans are the opposite. When you apply for these types of loans an asset is put up for collateral simply meaning if you don’t pay, they can get paid by taking your house, car or anything else you put up for collateral. Because these are less risky the interest rate is lower which saves you, as the borrower, money.
Today let’s focus on secured loans. There are two types of secured loans: recourse loans and non-recourse loans. As mentioned above both of these types of secured loans are signed with collateral to protect the lender. But which kind of secured loan is best for you and your business?
Let’s find out!
What is a recourse loan?
The majority of loans given today are recourse loans. This means you are signing a note that says “I promise to pay” and if you don’t fulfill your commitment they have the right to sue you. While this is an extreme case scenario and obviously something to avoid, sometimes this is unavoidable.
What is a non-recourse loan?
Now let’s talk about the opposite of a recourse loan, a non-recourse loan. These are loans backed by collateral but does not allow the lender to come after you personally for the money you haven’t paid. They can only go after the collateral you put up when you signed for the loan.
Another term to know: CMBS loans
While researching these different types of loans you may have seen the abbreviation of CMBS. This stands for Commercial Mortgage Backed Securities.
What does that mean?
Well it means when looking specifically at commercial real estate it refers to a loan being pooled with other loans being bundled with other loans and securities and being sold to investors for a return. These types of loans are often non-recourse, have competitive rates and are fixed for ten years.
Something to note. These types of loans often have prepayment penalties and other protection for the investors to ensure they make money off of them. If you are looking at these types of loans know what these fine print details are before signing.
Let’s look at an example. So you have this hotel that is doing very well but it is need of executing it’s PIP plan or Property Improvement Plan to fix the outside up a bit. You don’t have the funds to execute this plan so you start looking around for loans.
If you receive a recourse loan but in a few months you default because you can’t pay it off then the lender can come after you personally for their money. After seizing your assets you put up for collateral when you signed the loan and that doesn’t fulfill the due money they can sue you.
But what would have happened if you had received a non-recourse loan to execute your PIP plan? Well if in a few months you default on the loan they will seize the collateral you put up and that’s it. They can not come after you personally for any more money.
Something Worth Mentioning
You must read the fine print and be aware that if you as the borrower acts irresponsibly then your non-recourse loan CAN turn into a recourse loan. This is often written in contracts to protect lenders from losing money to people trying to cheat the system in some way.
How can you avoid your non-recourse loan to change into a recourse loan? Here are three simple steps to avoiding this.
Don’t act irresponsibly.
- Don’t misuse funds.
Read the fine print and know your contract before signing.
Are there any other benefits to a Non-recourse loan?
A non-recourse loan does not count as a liability on your financial forms. This means that you can go borrow more money based on your assets. This leaves the door open for you to invest in that other dream business and grow it too.
Let’s Talk Taxes
For either type of these loans know you don’t have to pay taxes on the borrowed money. If you default on your loan then dependent on your unique situation you will need to file taxes in unique ways. Please consult your accountant about what is best for you.
Which one is better?
While we can’t recommend the best loan to every business because there is no one size fits all. Each business is in a unique position but in general you want a non-recourse loan, if you can get one. It provides extra protection to you as a borrower from potential lawsuits. We don’t know how the economy is going to change so seize the opportunity to protect yourself and apply for non-recourse loans.
If you are a hotel owner, mobile home park owner, apartment complex owners or storage unit owners we are ready to help you get a non-recourse loan so you can grow your business.
Call us today at (770) 203 4857
or fill out the contact form below