Limited Recourse Loan Agreement

A limited recourse loan agreement is a finance arrangement in which a lender has limited rights to pursue the borrower in case of default and can only recoup losses from specific assets or collateral put up as security.

This type of loan agreement is common in project finance, where a borrower is seeking funding for a specific project such as infrastructure development or large-scale construction. In such cases, lenders are willing to provide limited recourse loans because the underlying assets or project generate steady cash flows, which can be used to repay the loan.

The limited recourse loan agreement also protects the borrower from personal liability beyond the pledged collateral. In other words, if the borrower defaults on the loan, the lender can only seize the collateral and cannot go after the borrower`s personal assets or other business ventures.

The structure of a limited recourse loan agreement involves careful analysis of the project`s risks and potential rewards. The lender evaluates the borrower`s financial status, the feasibility of the project, and the potential revenue streams that could repay the loan. The lender also assesses the potential risks concerning market conditions, natural disasters, and regulatory changes that could affect the project`s success.

The borrower, on the other hand, must ensure that the pledged collateral is sufficient to cover the loan amount and that the revenue streams are sustainable over the loan term. The borrower must also ensure that the loan agreement clearly defines the lender`s limited recourse rights, the collateral`s valuation, and any penalties or fees associated with default.

Overall, a limited recourse loan agreement is a viable financing option for large-scale projects that generate steady cash flows. Both lenders and borrowers need to perform their due diligence to minimize risks and ensure a successful loan agreement.

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