Self-Liquidating Loan Definition

What Is a Self-Liquidating Loan?

A self-liquidating loan (or self-liquidating offer) is a form of short- or intermediate-term credit instrument 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 timed to coincide with when the assets are expected to produce income. These loans are intended to finance purchases that will quickly and reliably generate cash.

Key Takeaways

  • A self-liquidating loan is a type of short term loan whereby the funds borrowed are used to buy some asset, which is in turn sold at the loan's maturity to repay the loan.
  • Cash-producing assets or projects are often the target of these loans since they can easily be repaid by selling the capital purchased, and pocket the cash generated as profit in the interim.
  • Some types of financial scams that seem too good to be true utilize self-liquidation as a hook to lure unsuspecting marks.

How a Self-Liquidating Loan Works

Although few loans are legally named "self-liquidating," the term is commonly used by bankers to refer to lending arrangements that work in this manner. It is also used by some scam artists, as we explain below.

A retail business might use a self-liquidating loan to purchase extra inventory in anticipation of the holiday shopping season. The revenue generated from selling that inventory would then be used to repay the loan. Self-liquidating loans are not always a wise credit choice for businesses. For example, they do not make sense for buying fixed assets, such as real estate, or depreciable assets, such as machinery or office equipment.

In many ways, a self-liquidating loan is much like a revenue bond with a sinking-fund feature. Revenue bonds are secured by specific revenue sources, such as tolls in the case of a highway, and a sinking fund dedicates money to be set aside for debt settlement.

Self-liquidating loans don't make sense for buying fixed or depreciable assets.

Self-Liquidating Loan Scams

There are also a number of investment scams that call themselves "self-liquidating loans" or "self-liquidating assets." Most of these use the vagaries surrounding "self-liquidating" to give the appearance of less risk or more security than is justified. An unsuspecting or financially inexperienced investor or business owner can fall victim to good salesmanship and misrepresentation.