This site uses cookies. By continuing, your consent is assumed. Learn more

118.4fm shares

Self-liquidating trade letters of credit

opinion

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 Self-liquidating trade letters of credit. 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.

News feed