Self-Liquidating Loan

Think of it as a loan that takes care of itself. Like a self-cleaning oven or a self-driving car.

Obviously, you still have to sign all the paperwork and make sure the payments get from Point A to Point B. But, assuming everything goes as planned, the self-liquidating loan will produce the revenue needed to repay the amount borrowed.

Generally, it operates like this: you borrow money to purchase a revenue-generating asset. The cash you bring in from the asset then gets used to pay off the loan.

You own a bar. You think a pinball machine would get a lot of business. You borrow $2,000 to buy the pinball machine. Instantly, it starts bringing in tons and tons of quarters...$200 a month. You use that money to pay back the loan. Within a year, you've paid back the loan principal and all the accrued interest. Now you get to keep the extra $200 a month generated by the pinball machine.

That loan you used to purchase the pinball machine counts as a self-liquidating loan. You used the money to buy an asset that created revenue for you, which you then used to pay off the loan.

That's different than, say, using the loan money to buy a pinball machine for your basement. You might have fun with the machine...but you'll need to get the cash to pay off the loan from somewhere else. It's not self-liquidating.