“What Is The Difference Between Recourse And Non Recourse With An Equipment Lease?”
Any equipment lease that you are looking to enter into or already are participating in will either have a lessor clause related to recourse.
Recourse provides the lessor with the right to take collection actions against the lessee and signed guarantors in the even that the liquidation of the asset or assets held as security fail to retire the debt outstanding.
In the situation of a lease, the leasing company owns the asset that you are using under a lease agreement.
If you default on making payments to your lease agreement or have some other type of default, the lessor has the right to claim their equipment from you and liquidate it, applying the proceeds from sale to the amount still owing on the lease.
Recourse comes into play when there is still funds outstanding at the end of the liquidation process.
Non recourse does not provide the lessor with any other collection rights to get back the amounts still owing.
Most equipment leases are provided with recourse to the business and whoever else has guaranteed the lease.
Some leasing companies will offer non recourse as different product to the market to attract businesses that are looking to contain the business liability to the equipment being financed.
Under a non recourse agreement, the terms of financing typically will provide a greater security value in the assets being funded.
For instance, instead of providing 100% financing under a recourse agreement, a non recourse agreement may provide a lesser amount of financing on the asset to provide greater security margin to the lender.
In the short term, this would require the business to provide a larger down payment, but in the worst case scenario their risk to the transaction would also be limited.
Recourse can also be provided by third parties to the transaction such as the dealer selling the equipment or a totally unrelated party.
This provides the leasing company with a liquidation pathway for the asset in the event of default.
An example of this would be a dealer that sells used equipment and provides recourse to various lenders on assets they are funding.
This is typically limited recourse in that the dealer will promise to pay a certain percentage of the market value of the asset.
The dealer does this to be able to get assets at a good price to place on their lot for resale. If the dealer is selling the initial asset, this also a way for the dealer to complete the sale by providing some form of recourse to a lender so that financing can be put into place to close the purchase and sale transaction.
If you are looking at an equipment lease that has a recourse clause in it, make sure to read through it carefully so you understand the extent of the recourse.