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The principle of self-liquidating debt as a tool for managing firm liquidity


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.

Explain the principle of self-liquidating...

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.

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