Self Liquidating loan:

Self liquidating involves goods which are convertible into cash in a short time. They are used for business transaction. It has the means to yield a profit on the initial outlay or to finance any recurrent outlays. As per the Banking definition a self liquidating loan refers to the loan that is repaid from the liquidation of the inventories. For example, a Hire purchase transaction if the installments are paid regularly.

 The cash realized from the assets is then used to repay the loan. This kind of loan is usually recommended for the companies which have excellent credit rating. Short term unsecured loans are self-liquidating. Self liquidating assets generate adequate income to return the total amount of its cost.

An example of self liquidating would be the construction of a building or a toll bridge. The building could be leased out to a tenant to generate an income. Hence it has an ability to pay off the total cost of the original building. Similarly the toll bridge would generate enough revenue to pay off the initial investment. The acceptance market provides investors a means by employing temporary excess funds for short periods with a minimum amount of risk.

The self liquidating income can be realized by engaging into various investment markets, for example the foreign exchange markets. For example the currency investor can be a currency which is relatively weak; he can hold on to it until it becomes strong and then sell it for a substantial profit. The buyer should have a good sense of what will be desired asset when he engages in the self liquidating loan. Without properly evaluation and derivation of the best advantage, the attempt to earn a profit would fail. Hence investors carefully analyze past performance and future potential before entering into such a venture.

Questions:

• What is a self liquidating loan?
• How is the income from self liquidating loan realized?