Recourse finance allows a finance provider to require the borrower or seller to repay or replace financed assets under agreed conditions. The provider therefore relies on both the asset and the business's contractual repayment obligation.
How does recourse work?
If a financed receivable becomes ineligible, disputed or unpaid beyond the permitted period, the business may need to repurchase it, replace it with another eligible asset or repay the advance.
How can an outstanding recourse amount be calculated?
Assume a $50,000 receivable was financed at an 80% advance rate. The funded amount is $40,000. If the receivable becomes subject to full recourse after the customer has paid only $10,000 to the controlled collection account, the illustrative remaining funded exposure is $30,000 before fees or reserves.
Illustrative recourse exposure
| Calculation step | Amount | Method |
|---|---|---|
| Financed receivable | $50,000 | Eligible face value |
| Initial advance | $40,000 | $50,000 × 80% |
| Collections received | ($10,000) | Applied to funded exposure |
| Illustrative exposure | $30,000 | $40,000 − $10,000 |
Actual recourse depends on the contract, reserves, fees, recoveries and whether collections reduce principal.
Recourse vs. non-recourse finance
Non-recourse finance transfers specified debtor credit risk to the provider, subject to exclusions. Recourse finance retains more repayment risk with the business and may therefore have different pricing and eligibility.
What should be reviewed?
Check recourse events, cure periods, aging, disputes, dilution, warranties, reserves, security and collection controls. “With recourse” does not explain every obligation without the agreement.
