Financing your dream project can sometimes be tricky, especially when it comes to choosing between borrowing from banks or private enterprises. As many individuals and corporate bodies continue to go for non-recourse commercial financing, it is imperative that we discuss the key differences between these two options.

What is non-recourse financing?

When a person takes out a non-recourse loan, the lender can only be repaid using the profits from the project the loan is funding. The lender cannot take the borrower’s other assets if the project doesn’t make enough money. These loans are usually backed by collateral, like property or equipment.

Non-recourse financing can be obtained from private sources as well as bank loans. For clarity’s sake, let’s quickly define both terms.

Defining private loan sources

Private financing sources are sources that do not operate like banks. They can be individuals or even institutions like investment companies, hedge funds, or corporate societies. Private loan sources usually operate under minimal documentation and demand lesser bureaucratic documentation before releasing funds, hence their flexibility and speed. While they offer many other advantages, private loan sources also have their downsides, as you will soon discover in this article.

Defining bank loan sources

These are traditional banks that offer non-recourse loans in addition to a range of services. If you are looking forward to getting a non-recourse credit facility from a bank, you will likely go through some regulatory-motivated processes. This is because these institutions operate under strict regulations. Here, loan processing is standardized, and the interest rates are usually lower. Yet, drawbacks such as processing time and limited eligibility often pose problems for borrowers.

Key Differences Between Private and Bank Non-Recourse Loans

Risk Tolerance Capabilities

Risk is a principal factor in the world of loans and credits. It is usually the major decider whether a borrower obtains credit facilities. For private lenders, the propensity to bear unconventional levels of risk is high. Private lenders are more likely to fund your project if you are looking forward to financing a complex or daring project. On the other hand, banks do not have a high-risk tolerance. This is why time and effort are taken to verify collateral status and document important details. If your project is perceived to have lower risk, a bank will likely meet your credit needs.

Terms of Credit Facility

The major difference between the terms of private loans and banks is flexibility. Private lenders can offer flexible repayment plans that can change throughout the period of payment. For instance, if your project suffers from an unforeseen challenge during the period of payment, such as a sudden change in market conditions, it is easier to appeal for a lenient repayment package. Succinctly, private lenders can offer flexibility in repayment rates, interest rates, repayment duration, and penalties for payment defaults. It is quite the opposite for most banks, as the payment rates, interest rates, and repayment duration are fixed and agreed upon from the onset.

Loan Processing Fees

Fees such as origination and commitment fees can be higher with private lenders, while banks usually charge less for these fees. Sometimes, banks can add fees such as underwriting and appraisal fees.

Flexibility and Processing Speed

Credit needs often differ from borrower to borrower, which is where flexibility becomes important. You will likely get credit facilities tailored to your specific needs from private lenders other than banks. Also, if time is an asset you don’t have in abundance, private lenders are your best bet to give you a loan fast. Banks take their time to process your loan request, especially if your project is unconventional. Also, your loan request has to meet certain criteria and fall into a predefined category to be granted by a bank.

Interest Rates

Private lenders charge higher interest rates than banks, and this is understandable. Private lenders take more risks than traditional banks, and the higher interest rates are a form of compensation. You are likely to enjoy lower interest rates from banks thanks to regulatory policies and the low-risk profile of your project.
Before you decide between a bank and a private lender for your non-recourse loan, consider the following factors.

What to consider before choosing a bank or a private lender

Obtaining a non-recourse loan from a bank or a private lender has its pros and cons. However, considering the following factors, you can make guided decisions that best suit your needs.

• Does your project have high or low risk?
  If your project is complex and has relatively high risk, a private lender will most likely suit your needs. Banks are risk-averse and would not facilitate any credit with risks higher than a stipulated level. Also, the profile of the borrower comes into play when borrowing from banks. So, if you have a history of loan defaults, banks may not fund your loan request.
• What interest rates and costs are you willing to incur?
  Sometimes, understanding the financial implications of taking a non-recourse loan is as important as being granted the loan. If this is the case with you, you may consider the bank option. Due to low-risk profile preference, banks usually offer loan facilities with lower interest rates.
• How urgently do you need the loan?
  Loan needs can often be urgent. However, banks take their time to process underwriting criteria and verify your collateral. This often takes time. However, if time is not one of your luxuries, you may want to consider private lending firms.

Final Thoughts

Non-recourse loans are usually used to finance projects capable of generating funds for repayment. While borrowers have between banks and private lenders to borrow from, they have their peculiarities. To ensure that you are making the right non-recourse borrowing decision, consider their peculiar differences and the factors itemized above.