The repayment of the principal of bank term loans are usually amortized, which means that the principal and interest are set up as equal periodic payments designed to pay off the loan in the specified period of time.In the past, small businesses have lived and died on the strength of bank loans, their primary source of small business financing.
One example of a self-liquidating asset would be the construction of a building or toll bridge for use in a city or town.
Because the building could be leased out to tenants and generate a regular income, it has the inherent ability to eventually pay off the total cost of the original building project.
Companies often want to match the maturities of their loans to the life of their assets and prefer short-term bank loans.
In reality, bank term loans are actually short-term, but because they are renewed over and over, they become intermediate or longer term loans.
The first is the intermediate term loan which usually has a maturity of one to three years. Working capital refers to the daily operating funds that small business owners need to run their businesses.
Working capital loans, however, can be short-term bank loans and often are.
In like manner, the toll bridge would eventually generate enough revenue to offset the initial investment.
From that point forward, both projects would be able to remain self-sustaining and even earn additional profits that could be used to fund other municipal projects.
Bankers prefer self-liquidating loans where the use of the loan money ensures an automatic repayment scheme. Many have fixed interest rates and a set maturity date. Term loans may be paid monthly, quarterly, or annually.
Some may have a balloon payment at the end of the term of the loan.
In many cases, self-liquidating assets can go on to generate profits after creating enough return to cover that initial expense.