Legal Definitions - with recourse

The term "with recourse" describes a condition in a financial transaction where a party who transfers a financial instrument, such as a check, promissory note, or invoice, retains liability for its payment if the original issuer or payer fails to honor it. Essentially, the transferor guarantees the instrument's value to the new holder. If the instrument is not paid as expected, the new holder has the right to demand payment from the party who transferred it "with recourse."

• Example 1: Selling Customer Invoices

  A small manufacturing company, "Widgets Inc.," needs immediate cash flow. It sells its outstanding customer invoices, totaling $50,000, to a factoring company "with recourse." This means Widgets Inc. receives cash upfront from the factoring company, but if any of Widgets Inc.'s customers fail to pay their invoices, the factoring company can demand that Widgets Inc. pay back the amount of those uncollected invoices.

  This illustrates "with recourse" because Widgets Inc. remains responsible for the payment of the invoices even after selling them. If a customer defaults, the factoring company can "go back" to Widgets Inc. for the money.

• Example 2: Endorsing a Promissory Note

  Sarah lends $10,000 to her friend Tom, who signs a promissory note agreeing to repay her. A few months later, Sarah needs cash and decides to sell this promissory note to another investor, Mark. When Sarah transfers the note to Mark, she endorses it "with recourse."

  In this scenario, if Tom fails to repay the $10,000 to Mark as per the note's terms, Mark has the right to demand payment directly from Sarah. Sarah, by endorsing "with recourse," guaranteed Tom's payment to Mark.

• Example 3: Discounting a Check

  A contractor, David, receives a large check from a client for a completed project. David needs to pay his subcontractors immediately but knows the client's check might take a few days to clear. He takes the check to a check-cashing service, which cashes it for a small fee. The service requires David to endorse the check "with recourse."

  If the client's check later bounces due to insufficient funds, the check-cashing service can demand that David repay the amount they advanced him. David's "with recourse" endorsement means he remains liable for the check's value if the original payer (his client) defaults.