Definition of self liquidating debt

The repayment schedule and maturity of a self-liquidating loan are designed to coincide with the timing of the assets' income generation.

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The company borrows money to buy more materials to take advantage of the increasing demand of the busy season.

Then when business slows down the company will have less of a need for borrowed funds to finance short-term assets like inventory accounts – the need for financing will decline as the need for inventory declines. “Analysis for Financial Management”, Mc Graw-Hill Irwin, New York, NY, 2007.

At this point, the company will have generated profits from the busy season, and will now be able to use those profits to repay the loans it took out to finance operations during the busy season. See Also: Loan Agreement Collateralized Debt Obligations When is an interest rate not as important in selecting a loan?

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The term can apply to a company that experiences seasonal fluctuations in business.

During the busy season when business is booming the company needs to borrow money to finance short-term assets such as inventory and accounts receivable.

If you follow these steps, eventually you’ll be debt free.

The problem is that following these steps isn’t always so easy.

Basically, a borrower takes out a loan used to finance business activities that generate revenue.

Then the borrower takes the revenue generated from those business activities and uses it to repay the money that was borrowed to finance the activities.

Self-liquidating loans are not always a good credit choice.

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