Demand Loan

A demand loan grants the lender the authority to demand partial or full repayment as needed. If you agree to the interest rate and loan terms, you can proceed with the necessary formalities. Essentially, a demand loan provides flexible repayment terms for businesses.

Businesses commonly refer to demand loans used to meet their working capital requirements as working capital demand loans (WCDL). They are also known as call loans since the lender can call for repayment at any given moment. This provision offers flexibility and serves as a safeguard for the lender.

Both the borrower and the lender reap benefits from this loan structure. You (the borrower) gain access to crucial funds while the lender maintains control over the loan repayment, thereby mitigating potential risks and ensuring the preservation of their investment. This mutually advantageous arrangement promotes a symbiotic relationship between both parties involved.

If you take a demand loan, you can repay it in part or full without worrying about the penalty. It is convenient for lenders, as it gives them an added layer of security by demanding repayment at any time.

One popular demand loan example is a loan taken by brokerage firms to fulfil the margin requirements of their clients. Clients who need funds in their trading account on an urgent basis seek a margin from the brokerage firms. Banks, NBFCs (non-banking financial corporations) and other financial entities provide these loans.   

The securities that the clients buy with a margin act like loan collateral. If a loan is taken to buy machinery, the purchased item acts as security or collateral. In short, tangible assets bought by using the loan amount act as collateral. 

If you do not purchase any tangible asset with this loan, you have to pledge an asset. This is because these are not collateral-free loans.

This may sound like a loan with a lot of uncertainty. However, the lenders and borrowers discuss the terms of the loan in advance, like the interest rate and the due amount, when demanding repayment.

Let us get an in-depth idea of what a demand loan is and understand the key differences between demand loans and term loans.

Purpose of a demand loan

Brokerage firms avail of the majority of demand loans. Yet, these loans are also provided to meet other requirements.

Some lenders may place restrictions on the end usage of the loan amount. Others may provide it without any restrictions. Some common purposes of availing of demand loans include: 

• Managing the working capital needs of a business.
• Purchasing an asset or equipment.
• Paying office rent, employee salaries, investing in financial instruments, etc.
• Establishing a startup or new business.
• Purchasing land, clearing vendor dues, etc.
• Applying for bridge financing. Bridge financing is a debt that you take for a short term while finding a long-term loan at a lower interest rate.

While it is possible to use this loan to acquire expensive equipment or machinery, it is advisable to refrain from making substantial purchases. The reason is that the lender retains the right to demand payment at any given moment, potentially causing financial strain that could be detrimental to your business.

Based on your loan requirements, lenders usually ask you to specify the intended purpose of using the loan. Usually, entrepreneurs, SMEs (Small and Medium Enterprises), startups, share market investors and venture capitalists take a demand loan.

A lender provides a demand loan to individuals or businesses having a good credit history. In short, the lender will sanction your loan application if you can demonstrate your ability to manage your debt.

Here are some examples that will help explain the purpose of a demand loan.

Example 1

Suppose a farmer needs a loan to start a dairy business in his area. He needs ₹1,00,000 but has no credit history to provide to the bank. In this scenario, he can avail of a demand loan by pledging an asset like a shop, land, etc.

Example 2

A company needs ₹2,00,000 to buy inventory urgently. They do not have enough working capital to make this purchase. In this case, a demand loan can be useful in meeting their fund requirements. The company can repay the loan when they have enough cash flow. 

Example 3

A chartered accountant has to pay salaries to his subordinates. However, he does not have enough funds on the designated date. He can pledge his securities and obtain a demand loan to pay the salaries on time. The loan can be repaid whenever he has enough funds to clear the loan in full.

Features of demand loans

Secured loans  

If you purchase an asset with a demand loan, it acts as loan collateral. Since these loans are mostly taken for a short term, they fall into the category of short-term secured loans. 

Easy management of instalments

You don't need to pay EMIs for a demand loan. You can manage the loan as per your financial plans.

Flexibility in terms of use 

You can manage multiple expenses with a demand loan. It can help you manage cash flow or expenses related to the daily operations of your business. Discuss your fund requirements with the lender in detail and use the loan amount as per your requirements.

Interest calculation

Interest is charged on the amount used after procuring the loan. Therefore, you do not have to pay the interest on the entire loan amount if you have not used it.

No prepayment fee

The lender will not charge a penalty or foreclosure fee if you prepay the loan before the scheduled date.

Tenure 

Demand loans have tenures as short as 7 days. The longest tenure for demand loans can be up to 1 year.

Though you can ask the lender to customise the loan tenure, the final duration will be at the lender's discretion.

Loan terms

The loan agreement contains the broader terms of the demand loan in detail. Information like interest rate, principal amount, maturity amount etc., are mentioned in the promissory note.

Distribution of loan components 

The lender may distribute the loan components over different maturity periods as per your specific needs.

Eligibility criteria

A demand loan is only granted to individuals who have Indian citizenship. Similarly, only businesses based in India are eligible for this loan.

To obtain this loan, register your business under the Companies Act of India. Your age must be at least 18 years or above when you apply for the loan.

Benefits of demand loans

Helpful for running a business

A demand or call loan gives you quick access to funds when your business faces financial difficulties. It can cover expenses such as employee salaries, inventory purchases, and rent.

Demand loans are especially suitable for businesses with predictable cycles that experience periods of increased capital needs. You can borrow the loan and repay it once your cash flow becomes stable again.

Businesses often use demand loans during their busiest times or when they don't have enough funds to run their daily operations. It's a convenient solution to keep things running smoothly. By securing a demand loan, you can ensure your business has the necessary funds to meet its obligations and seize opportunities even during challenging periods. Remember to carefully manage and repay the loan once your financial situation improves.

Easy repayment  

You can make small payments towards the loan as per your liquidity. You can continue making payments until you can repay the loan in full. This will help you in managing other expenses while repaying the loan.  

Fast approval

Demand loans are typically used for urgent short-term needs, allowing for fast processing and potential instant approval. Since the processing is quick and the documentation is minimal, the entire loan application process is smooth and hassle-free.

No instalments 

The loan repayment is either done in full, partially, or in smaller amounts. The lenders do not allow the loan to be repaid in instalments. Therefore, you do not have to worry about paying EMIs over a long duration.      

No prepayment fees    

You can prepay the loan whenever you have enough money. The best thing about a demand loan is that you do not have to pay any additional charges if you prepay a loan before the completion of your tenure.

Why should you prefer a demand loan?  

Demand loans serve the immediate funding needs of businesses, as shown in the examples above. You can make the repayment partially or in full without incurring any additional fees or penalties.

Banks and other financial institutions prefer offering demand loans to eligible applicants. By providing collateral, you provide security for the lender. In the event of a loan default, the lender can liquidate the collateral.

Therefore, it is crucial to repay the loan within the specified duration to maintain a positive relationship with the lender and avoid any potential adverse consequences.

To ensure a successful loan experience, it is advisable to carefully evaluate your repayment capacity and financial situation before obtaining a demand loan. This will help you determine the appropriate loan amount and repayment terms.

Consider these things while applying for a demand loan:

• Apply for the loan when you have a strong relationship with the lender. Your credit score should be good, and the loan tenure should be short. It will help you secure the loan at competitive interest rates.
• These loans are feasible for meeting your short-term goals. Therefore, you must get this loan at the right time and for the right purposes.
• These loans accrue interest daily. Therefore, it is not prudent to avail of a demand loan for the long term.

Applying for this loan makes sense if your credit score is poor. As it is a secured loan, the lenders have lower documentation criteria, thus requiring less paperwork. This makes the loan processing faster, making individuals with lower credit scores or no credit history eligible for the loan.

You may not have enough credit score or collateral to get a business loan. FlexiLoans can bail you out of such situations by providing an affordable business loan. We offer business loans for MSMEs and SMEs with minimal documentation. Apply for these loans online by visiting our portal today!

Difference between demand loans and term loans

As a business owner, you can also avail of a term loan to manage your capital requirements. Many borrowers do not understand whether to pick a demand loan or a term loan. To avoid confusion, you should know the difference between term loans and demand loans.

Term loans are long-duration loans, whereas demand loans are short-duration loans. Let us take a closer look at the comparison between these two types of loans -

Term loans are usually taken for managing big-ticket purchases. These big-ticket purchases may include purchasing heavy machinery, setting up a new plant, purchasing land, etc. Demand loans are not feasible for big-ticket expenses as they accrue interest daily.

Obtaining a working capital demand loan requires collateral, as do term loans. However, certain financial institutions may offer unsecured term loans based on your reputation, credit history, and existing relationship with the lender.

Note: There can be other differences between demand loans and term loans. These differences may vary as per the lender you choose for availing the loan.

Other types of short-term loans for businesses

Apart from a Working Capital Demand Loan (WCDL), you can avail of these short-term loans for financing working capital needs:

• Business line of credit: It is a revolving credit facility that allows you to borrow a specific amount as per your credit limit. You can repay the amount with interest and continue using the line of credit, similar to a credit card.   
• Overdraft: It allows you to borrow extra funds to a specified limit if the funds in your account are insufficient. It is a form of credit that businesses can avail to manage their immediate fund needs.
• Cash credit: It is a short-term loan that you can get from banks, NBFCs, and other financial entities. The lender calculates the interest on the amount withdrawn and not on the available limit.
• Working capital term loans: Lenders offer these term loans to help you manage your short-term business needs.
• Bill discounting: The lender will pay you according to your customer's bill and deduct a commission. The bank will present the bill to your customer on the due date and collect the loan value.
• Bank guarantee: It is a promise of fulfilling your liabilities if you fail to meet them.
• Channel finance: Channel finance means that the bank will provide you with funds whenever you need them across your supply chain.

Invoice factoring: The bank pays a substantial part of the pending invoice as a loan. It pays the remaining part when the customer pays the invoice. The bank also deducts a factoring fee for the same.

Frequently asked questions