What Does “Without Recourse” Mean?
In finance, “Without Recourse” is a phrase that appears on a bill of exchange or similar financial instrument to signify that the holder has no right to seek payment or reimbursement from the person (endorser or drawer) from whom they purchased it, if the bill is not paid at maturity. This term protects the seller or endorser from liability if the final payer defaults.
In cases where the term “without recourse” does not appear on the bill, the holder has the right to seek compensation from the drawer or previous holders if the bill is dishonored when it matures.
Key Characteristics:
- No Liability: The seller or endorser of the bill limits their liability to the purchaser.
- Defaults: If the final payer defaults, the holder cannot seek compensation from prior parties who endorsed the document.
- Written Endorsement: The term “without recourse” can be written on the face of the bill or included as part of an endorsement.
Examples
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Trade Financing: A company sells goods to an overseas buyer and receives a bill of exchange in return. This bill can be sold to a financial institution “without recourse,” meaning the financial institution bears the risk if the overseas buyer defaults.
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Factoring: A company sells its receivables to a factoring company “without recourse.” The factoring company assumes the credit risk and cannot demand payment from the original company if debtors fail to pay.
Frequently Asked Questions (FAQs)
What Is a Bill of Exchange?
A bill of exchange is a written, unconditional order directing one party to pay a specified sum to another party. It is commonly used in international trade.
How Does “Without Recourse” Differ From “With Recourse”?
“With recourse” means the holder can seek payment from the endorser if the bill is unpaid at maturity. “Without recourse” removes this right.
What Are the Benefits of a “Without Recourse” Agreement?
It transfers the risk of default from the seller or endorser to the buyer, providing the seller with protection against non-payment risk.
Can “Without Recourse” Be Applied to Other Financial Instruments?
Yes, it can be applied to other financial instruments like promissory notes and accounts receivable.
Is “Without Recourse” Commonly Used in International Trade?
Yes, it is commonly used to transfer credit risk during international transactions.
Related Terms
Bill of Exchange
An unconditional order issued by one party directing another to pay a specific amount to a third party at a future date.
Endorsement
A signature or statement of approval on a financial instrument indicating the transfer of rights from one party to another.
Factoring
The process of selling accounts receivable to a third party at a discount.
Assignment of Receivables
Transferring the rights to receive payment of receivables from one party to another.
Recourse
The legal right to demand compensation or payment from the issuer or endorser if an obligation, such as a loan or bill, is not fulfilled.
Online References
- Investopedia: Without Recourse
- Corporate Finance Institute: Bill of Exchange
- The Balance: How Factoring Works
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard Brealey and Stewart Myers
- “International Finance: Theory and Policy” by Paul Krugman and Maurice Obstfeld
- “Financial Instruments: A Comprehensive Guide to Accounting and Reporting” by Steven M. Bragg
- “The Handbook of International Trade and Finance” by Anders Grath
- “Understanding Factoring and Other Receivables Financing: A Practical Guide” by Sidney Sonson
Accounting Basics: “Without Recourse” Fundamentals Quiz
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