A self-liquidating loan is a form of short- or intermediate-term credit that is repaid with money generated by the assets it is used to purchase.
The repayment schedule and maturity of a self-liquidating loan are designed to coincide with the timing of the assets' income generation. These loans are intended to finance purchases that will quickly and reliably generate cash. Although technically, few loans are actually legally named "self-liquidating," this is more appropriately called bankers slang or a feature of a loan or credit facility. A business might use a self-liquidating loan or assets to purchase extra inventory in anticipation of the holiday shopping season.
The revenue generated from selling that inventory would be used to repay the loan. Self-liquidating loans are not always a good credit choice.
For example, they do not make sense for fixed assetssuch as real estate, or depreciable assets, such as machinery. In many ways, a self-liquidating loan is a synthetic form of a revenue bond with a sinking-fund feature. Whereas revenue bonds are secured by specific revenue sources, as such tolls for highways and a sinking fund dedicates money to be set aside for debt settlement.
There are also a number of scams that call themselves "self-liquidating loans" or "self-liquidating assets. An unsuspecting and often financially challenged investor base can fall victim to good salesmanship and misrepresentation.
What is a 'Self-Liquidating Loan' A self-liquidating loan is a form of short- or intermediate-term credit that is repaid with money generated by the assets it is used to purchase. Find out how loaning cash to family or friends can put a strain on your relationship and your bank account. Learn how to properly make family loans safe. If you are seeking a personal loan, be aware of these pitfalls before you proceed.
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