What Does it Mean to Liquidate a Loan?

Loan liquidation is an interesting concept to examine in this particular season. A season plagued by recession, inflation, stringent governmental policies, and other financial challenges. It won’t be surprising if you have heard about this financial term before. “Liquidated loan” is a common financial term.

You have heard it on the news, watched it on TV, and seen it on your mobile financial apps. But have you really taken the time to find out the meaning of this financial concept? What does it really mean to liquidate a loan?

What does it mean for a company to be liquidated? How about a self-liquidating loan? Can you liquidate your loan? Or does it mean that the scientific jargon, “change of state” is also applicable in the finance world?

In science, water (ice) changes in state from solid to liquid in a process known as melting. Can we say the same for loan liquidation? Does loan liquidation mean a change in the state of loans from debt to tangible liquid? If that’s not the case, then what does loan liquidation mean?

Those are the questions this piece aims to answer. At the end of our exploration, every confusion surrounding the term, loan liquidation will have been demystified. So, stay with us while we delve into the concept in detail in the subsequent sections.

What is Liquidation?

The term liquidation has various meanings in different financial contexts.

In one context, it is a phenomenon that describes a situation that occurs when a business folds up and sells off its assets or other valuables to clear off its debts. At times, this could be an action that emanates from bankruptcy or from an intention to explore other business options. In such a case, the business can be said to have been liquidated.

Asset liquidation may result from a voluntary election or a forced directive. In scenarios where businesses are bankrupt and have accrued substantial debts, liquidation of assets is an explorable pathway. Also, when businesses, for some reason, decide to close down and sell off their assets for monetary returns, it is still a form of liquidation, and this brings us to the next definition of liquidation.

Liquidation could also be defined as the process of converting assets to cash, i.e., turning assets into liquid. Liquid in this context means cash (not your regular water kind of liquid). This particular definition exposes us to other dynamics of liquidation. Assets could be liquidated for various reasons.

In one instance, it could be to free up cash even when there are no financial challenges; in another instance, it could be to purchase a more promising asset. There might even be other scenarios where the investor who owns the asset is in urgent need of cash and decides to liquidate their assets for monetary proceeds.

There are times when assets are even utilized to lock in capital for a period of time for the sole purpose of liquidation in the long run. So, different individuals and corporate bodies liquidate their assets for various reasons. Government policies may also lead to the liquidation of organizations. In the next section, we will examine a list of liquidated organizations in Nigeria.

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Examples of Liquidated Organizations in Nigeria

Five months ago, the Leadership Nigeria newsroom published a report about a list of banks that the CBN had liquidated. The list include:

• Liberty Bank
• City Express Bank
• Assurance Bank
• Century Bank
• Allied Bank
• Financial Merchant Bank
• Icon Merchant Bank
• Progress Bank
• Merchant Bank of Africa (MBA)
• Premier Commercial Bank
• North South Bank
• Prime Merchant Bank
• Commercial Trust Bank
• Cooperative and Commerce Bank
• Rims Merchant Bank
• Pan African Bank
• Fortune Bank
• All States Trust Bank
• Nigeria Merchant Bank
• Amicable Bank

Excerpts from the Leadership Nigeria Report

Mrs Imam further stated that recently, following the revocation of licenses for 179 Microfinance Banks (MFBs) and 4 Primary Mortgage Banks (PMBS) by the Central Bank of Nigeria (CBN), the NDIC immediately commenced liquidation of the banks and began disbursing insured sums to depositors within just 7 days of the closure of these banks.

“It’s Important to note that out of these, the NDIC has paid N1.595 billion) to 41,034 depositors of 129 MFBs and three PMBS, Payments are still ongoing and depositors with funds exceeding the insured limit will receive liquidation dividends after recovery of debts and sale of physical assets of the closed banks.

“Ladies and gentlemen, it is imperative to note that in the unfortunate event of bank failure, the current insurance coverage for depositors varies across different banking institutions.

“While depositors of Deposit Money Banks (DMBs), Primary Mortgage Banks (PMBs), Non-Interes: Banks (NIBs), Payment Service Banks (PSBS), and subscribers of Mobile Money Operators (MMOs) are insured up to a maximum limit of N500,000 per depositor per bank, for depositors of Microfinance Banks (MFBs), the maximum insurance limit stands at N200,000 per depositor per bank.

“These Insured limits undergo periodic reviews by the Board of the Corporation, ensuring comprehensive coverage for the majority of depositors. Furthermore, depositors holding balances exceeding the insured sums receive regular payments of the excess in the form of liquidation dividends, that also extends to the benefit of creditors and shareholders of the respective banks,” she said.

In the next section, we will examine the origin of the word “liquidate.”

Origin of the Term Liquidate

Throughout history, the word “liquidate” has been used in a variety of settings and in one form or another since the 16th century. The Latin word “liquidus,” which means “to melt” or “make clear,” is where the name originates. Later, financial and legal experts used the phrase to describe the quick sale of assets, payment of debts, and distribution of proceeds. “Liquidate” in this sense is to turn assets into cash that can be distributed to shareholders or used to settle obligations. That said, let’s examine what loan liquidation means.

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What Is Loan Liquidation?

Loan liquidation, in simple terms, means paying off a loan. So, the next time you hear the term, “liquidated loan,” you know it means a loan that has been paid completely. However, the method by which loans are liquidated varies from debtor to debtor. There are different methods of liquidating a loan.

Some sell off or transfer the ownership of the assets acquired from the loan to settle the loan in a process known as disposition.

For some, it is by paying a lump sum of cash to clear off their debt, either before the end of the loan tenor or at the end of it.

Loan liquidation can also be done by refinancing a loan. This method involves taking out a new loan to liquidate (by now you know what we mean by liquidate) an existing loan. This can be for various reasons:

• It could be to get a lower interest rate
• It could also be to get a longer longer loan tenure

The point to keep in mind is that in loan refinancing, the new loan replaces the old loan, effectively liquidating it.

And then we have another method of loan liquidation, which is compromise. In this case, the lender and the borrower reach a certain agreement, which enables the borrower to pay off their loan. The borrower may not get to pay up to the initially agreed amount in this loan liquidation option. However, it is important to know that it is purely based on the compromise (agreement) both parties (lender and borrower) arrived at. In the next section, we will examine another interesting concept known as self-liquidating loans.

What Is a Self-Liquidating Loan?

Take for instance, how “Abaya” is a hot product in Nigeria during the Muslim Eid al-Fitr celebration. Or, a more universally relatable example would be how sanitizers and nose masks gained massive sales when COVID-19 struck.

A retail company may employ a self-liquidating loan to buy extra supplies in advance of the expected festive shopping, as demonstrated by the purchase of Abayas or COVID-19 nasal masks and sanitizers. The loan would subsequently be repaid using the proceeds from the sale of that merchandise.

So, a self-liquidating loan, to put it simply, is a type of short- or intermediate-term credit instrument that is paid back using the proceeds from the assets it is used to buy. A self-liquidating loan’s maturity and repayment schedule are arranged to correspond with when income from the assets is anticipated. These loans are meant to be used to finance investments that will yield cash flow both quickly and consistently.

In the next section, we will examine another interesting concept, tips on how to liquidate a loan.

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Tips on Loan Liquidation

When you take a loan, ideally, you ought to have structures and measures that can facilitate the loan liquidation in place. Here are some heads up or tips to keep in mind:

• Prioritize your loan repayment.
• Do not take a loan that you don’t have a clear repayment structure for. In other words, you need to have envisaged and planned out the means by which you will repay the loan.
• Do your calculations before taking a loan, ask yourself what you need to put in place to be able to meet the loan terms and agreement.
• Do not spend your loan on frivolities; invest in the business you had envisaged before taking out the loan.
• Do a thorough risk assessment of the business you are investing in, or the asset you are purchasing. Know the factors that are within your control and those that are not, and the impact they pose on your investment.
• Save ahead for your Equated Monthly Installment (EMI) before it is due.
• Research has shown that focusing on repaying a smaller loan while neglecting a large loan with a higher interest rate often results in accruing more interest and extending the repayment period. Try to clear up your high rate loan as much as you can. This ensures you don’t extend the repayment period or get an increase on the interest you are to pay. But then, one size doesn’t fit all, and your situation may be peculiar. In that case, it is advisable to exercise your discretion.
• If you get an increase in your income, you should increase your repayment percentage. This cuts down on the loan tenor (the time you have left to pay your loan).
• Lastly, invest wisely.

Conclusion

We have come to the end of this piece, and if you have read thus far, you now know the subtle distinctions between loan liquidation and company liquidation. If you found this piece useful and are sure you are not liquidated, kindly follow us for more on X or Twitter, @SiliconAfriTech. Okay, that was a lighthearted joke. But really, you should check out some other interesting contents on our social media platform.