Demand Loan: Loan Requirements

Like any other profession, the financial sector is crammed with jargon and technical terms and one such term is demand loan, which is more than just being another jargon term that the ordinary layman cannot understand. These are specialized financial arrangements which operate in precisely the same manner as an ordinary loan with one crucial difference: after the loan has been issued, the lender can at any time thereafter, demand of the borrower that the full value of money that remains outstanding be repaid.

Lender Can Demand Repayment Anytime

As can be plainly seen then, a demand loan differs quite radically from traditional loans, as the traditional loans will contain a clearly identified and expressed “end date” by which time the loan must be repaid back in full, else the borrower faces severe consequences. Upon superficial examination, this particular form of loan appears to be a rather unappealing and disadvantageous policy for the borrower, because after all, the lender could call up the loan at a time when the borrower is unable to pay. This would (in theory) then allow the lender to take further action against the borrower for non-payment of the loan.

However, because the borrower is paying interest on the value of the outstanding balance this means that the lender is earning some money from the venture and in actual fact, it is only interest that is paid until the actual principal sum is paid off in full. The most usual instances where the loan will be “called” in will be when the lender discovers that the borrower is potentially facing bankruptcy or other insolvency proceedings. In such an event, the lender will demand the loan well in advance of the relevant proceedings being initiated in order to ensure that the estate and assets of the borrower are not whittled down to such an extent that they are unable to repay the loan.

Benefits to Borrowers

The borrower also enjoys considerable benefits from a demand loan, in particular due to the flexible nature of the loan which does not include or involve a rigidly defined repayment schedule. It is quite common to encounter these loans in the financing of a new business venture; where the profitability of the business has not yet been firmly established and where traditional loan repayment schedules are too onerous for the business. A demand loan in such a scenario would allow the borrower to make small, manageable payments to the lender in order to provide some form of guarantee, and then gradually increasing the repayment amounts when the business picks up and becomes more profitable.

These types of loans can work out to be extremely profitable and beneficial for both borrower and lender, as it provides a welcome break from the traditional forms of business financing which ended up stifling many young, fledging companies before they could even grow properly. That said, these loans are not suited for every situation and will depend entirely upon the bargaining power as well as the requirements and resources of both the borrower as well as the lender.