Definition of nonrecourse loan

1. loan where the lender's source of repayment is the cash flow generated by a project financed by the loan or the collateral securing the loan. The nonrecourse form of financing commonly is used in factoring of accounts receivable. The lender fully assumes the credit risk. If the borrower defaults, the lender's only recourse is to foreclose on the collateral backing the loan; the borrower is not liable personally for repayment. In a nonrecourse mortgage loan, for example, the lender must look to the collateral, rather than the borrower, as the ultimate source of repayment.
2. dealer floor planning arrangement in which the liability of the dealer, for example, an auto dealer, is limited to warranties about the genuineness of the paper offered for sale, vehicle title, and so on. The dealer cannot be required to buy back defaulted installment contracts from the lender, as he or she would be required in recourse financing.
3. agricultural loan in which the lender is legally barred from taking action against the borrower if the loan collateral (the farmer's crop), is insufficient to repay the loan. This type of financing is done through the federal government's direct loan program for farmers.

type of financial arrangement used by limited partners in a direct participation program, whereby the limited partners finance a portion of their participation with a loan secured by their ownership in the underlying venture. They benefit from the leverage provided by the loan. In case of default, the lender has no recourse to the assets of the partnership beyond those held by the limited partners who borrowed the money.