Self liquidating loan definition
When a trade line goes bad, banks can shut it down pretty quickly.Not so true if you are tied up in a medium term commodity financing structure. If you would like to receive TFM's weekly digest, sign up here.Banks and their lobbying advocates have been using the above to push back on more stringent capital rules.
This is especially important with emerging and developing economies, where companies may not have the balance sheets to access credit or the leverage to achieve favorable payment terms from overseas suppliers.
But the reason trade does have such low risk is because of the inherent nature of the product.
Because it is short term and because in many cases self liquidating, by definition it is lower risk.
The collateral being offered to your lending bank is an AA rated Euro bank issued 10-year Zero Coupon Bond.
This bond matures in 10 years to the face amount of the “gross” loan amount, and at maturity pays off the principal of the loan for you.