A demand loan is a loan that a lender can require to be repaid in full at any time. This condition is understood by the lender and the borrower from the outset.
The arrangement has advantages for both parties. Lenders like the reassurance of being able to demand repayment, whether to pursue other investments or simply to recover their principal. Borrowers like the convenience and flexibility associated with demand loans because they can repay them in full or in part at any time, without penalty.
Borrowers use demand loans for many purposes, including:
- Bridge financing
- Partnership loans
- Investment loans
- Short-term funding for new businesses
- Purchasing small assets like cars, farm animals or used equipment
- Temporary working capital
All demand loans are documented with promissory notes that indicate the amount of principal as well as the interest rate. They always use a floating rate on the lender’s prime rate (e.g., prime + 2%). They offer a wide range of payment terms.
While those are the features standard to all demand loans, other options can be observed: Security may or may not be taken, principal payments may or may not be established at agreed intervals and redraw privileges may be added––that is to say that paid down portions can be redrawn by the borrower.