Demand Loan: The Disadvantages

Getting a business loan is one of the biggest steps in the success of your company. In order to get things started, you will need access to funds. One type of short term loan that is sometimes used with new companies is called a demand loan. It is also commonly referred to as a call loan. While it definitely has some good things about it, there are some disadvantages as well. Here are a few things to consider before you sign on the dotted line for a demand loan:

What is a Demand Loan?

A demand loan is designed to be flexible. On the part of the borrower, you do not have a specific repayment schedule. You get all of your money upfront and then making payments is basically at your discretion. This is great for a new business because you may not turn a profit for months or years. You can make smaller payments at the beginning and then grow your payment as you grow. The lender, in turn, can demand the balance of the loan at any point in time. If they want the money back, all they have to do is ask for it.

Loan Call

The biggest disadvantage to a demand loan is the lenders ability to call the loan at any point. While it is great to have flexibility in the repayment schedule, this feature makes it hard to plan for the future. For example, let's say you started a company from scratch and started out small, but are now increasing your revenue. You actually started to turn a profit recently. You have invested your life and money into this business for the last year. One morning the phone rings and the bank is on the other end. They decided that they want their money back. They do not need an explanation or any reason. All they have to do is call and you have to give them all the money back. If the money is tied up in your business, there is a reasonable chance that you will not have access to it. You may have to dissolve your new business just to give the lender their money back.

Interest

With a demand loan, you are being charged interest all the time. When you are not making payments at the beginning of the loan, the interest is still accumulating. The less you pay down on the principal, the larger your balance grows. This can result in some very large loan balances.