Without Recourse

Definition

“Without Recourse” is a financial term often used in business transactions. Basically, it means that the seller, after transferring an asset such as a loan or goods to the buyer, is not liable for any future credit risk associated with the asset. Simply put, the buyer assumes all the risk if the asset fails or defaults.

Phonetic

The phonetic spelling for “Without Recourse” is: /wɪðˈaʊt rɪˈkɔːrs/

Key Takeaways

<ol><li>Without recourse refers to when the buyer assumes the risk when a product or service fails to meet the perceived quality, value, or result. In terms of finance, it refers to the sale of loan or debt obligations where the buyer must bear any loss if the debtor doesn’t repay.</li> <li>Regarding loan agreements, the phrase ―without recourse― essentially frees the loan seller from any future claims. Once sold, the original lender cannot be held responsible for any default risks associated with the debt.</li><li>Without recourse provisions can help lenders mitigate risks and cash flow inconsistencies, allowing them to sell off non-performing loans. However, for a buyer, purchasing a non-performing loan without recourse is risky given the fact that the debt might not be recoverable.</li></ol>

Importance

The term “Without Recourse” is pivotal in business and finance, predominantly in the world of loans and debts. When a debt is sold “without recourse,” this essentially means that the entity or institution selling the debt will not be held accountable if the debtor refuses to pay or defaults on the loan payment. This is crucial as it significantly affects the level of risk assumed by the buyer—the risk of default is transferred from the seller to the buyer. Hence, the term also impacts the price at which debts are bought and sold. This term assures the sellers that they are entirely removed from future liability related to these debts, aiding them to manage their risk profile efficiently.

Explanation

The term “Without Recourse” is primarily used in the finance and business sector to denote a type of sale where the buyer assumes the risk if the product or service proves to be defective or unsatisfactory. This term can often be found in various financial transactions including loans, credit agreements, and bill of exchange agreements. The main objective of “without recourse” is to transfer the full risk from the seller to the buyer.Primarily, “Without Recourse” is utilized within factoring, a financial transaction type where businesses sell their accounts receivable, or invoices, to a third party commercial financial company called a factor. This is to ensure immediate cash flow instead of waiting for due dates of payments from their customers. In “without recourse” factoring, the factor assumes all risk of non-payment. It is a win-win situation where the business that sold its invoice gets an immediate cash flow, and the factor earns fees or a percent of the invoice amount when the payment is finally made by the debtor. These provisions provide sellers of goods or services the ability to manage and balance the risk of non-payment, while also maintaining appropriate cash flow.

Examples

1. Factoring Receivables: In the business world, a common example of “without recourse” is in factoring or selling receivables. A company might sell its receivables (amounts owed to the company) to a third party (factor) to improve its liquidity. If that sale is “without recourse,” the factor can’t go back to the company to collect if the customer doesn’t pay their invoice.2. Auto Loans: Some banks and financial institutions finance auto loans and then sell them to other entities. If these loans are sold “without recourse,” then the purchasing entity takes on all risk associated with the loans defaulting. The original lender cannot be held responsible if the borrowers fail to repay their loans.3. Letter of Credit: A bank issues a letter of credit to a foreign buyer, promising to pay the seller upon the fulfillment of the terms laid out in the letter of credit. If the letter of credit is issued “without recourse,” then the bank cannot seek reimbursement from the buyer if the buyer defaults on the payment. The risk lies with the bank.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Factoring
• Bill of Exchange
• Non-Recourse Debt
• Asset-Backed Security (ABS)
• Credit risk

Sources for More Information

• Investopedia
• Cornell Law School’s Legal Information Institute
• Business Dictionary
• Corporate Finance Institute