Demand Loan: One Loan Application

A demand loan is paid in full at an undetermined date in the future instead of being repaid with installments. The lender asks for the funds when it suits their purposes, which is called "calling" in the funds. The loan is also called a "call loan" for this reason. These loans tend to favor borrowers because they do not have a specific repayment date, which can be useful on many real estate ventures that will take a long time to become profitable. The application process for a demand loan is different from other business loans.

Finance Charges

Finance charges on a demand loan are assessed either periodically or all at once. If they are assessed in one lump sum payment, then the finance charge is more like a guaranteed payoff for the loan investment in the business project. This is the rarer form of interest and is used more with short term business loans. The more common way to assess interest on the loan is through periodic finance charges. The payments from these charges will be due like normal loan payments, month-to-month, or they may be due quarterly. The borrower has to keep these payments current in order to avoid defaulting on the loan.

Loss Protection

Both parties need to be very specific about loss protection when they are structuring a demand loan. For the business lender, it is possible the borrower may engage in unfavorable or risky activities while the loan is still open. The business lender should set specific guidelines regarding a time line for any project. Guidelines for additional debt the borrower may take on should also be put in place. If the borrower breaks these rules, then the lender has a right to call the loan in very quickly.

Similarly, a borrower needs to protect against the chance a lender will call the loan in well before they have the profits available to repay the debt. A borrower can protect against this by setting finance charges in a way that is favorable for the lender to keep the loan active. For example, if the interest rate goes up every 3 years, the lender will want to keep the loan alive as long as the borrower is in good financial standing.

Process to Apply

Applying for a demand loan can be more challenging than applying for other business loans. Borrowers need to find business lenders who are willing to provide this structure. This typically means working with investors and mezzanine lenders instead of standard banks. The loan application will resemble a business plan pitch. It is essential for the borrower to show the potential profitability of the project in solid financial projections. These projections, more than the borrower's credit history, will have the greatest impact over the terms of the loan.

If the borrower has a record of success in similar business ventures, that borrower will also have an easier time locating appropriate financiers for the demand loan. Included with the application should be all legal documents showing the business is operating within the law.