A demand loan, also known as a call loan or demand deposit, is a type of loan that can be recalled at any time by the lending company. The funds do not have a specific maturity date, so the bank can demand repayment of the full loan balance at its discretion.
Demand loans allow flexibility for borrowers in need of short-term working capital. However, to secure a demand loan requires careful planning and preparation. This article provides a comprehensive overview of the essential steps involved in applying for a demand loan.
Step 1: Determine Your Eligibility
The first step to secure a demand loan is assessing whether you are eligible for this type of loan. The main eligibility for demand loan set by most lending institutions include:
- Type of business: Demand loans work best for manufacturers, traders, and service companies in need of working capital.
- Time in business: You usually need to be a well-established business entity that has been operational for 3-5 years at a minimum.
- Revenue and cash flows: There are no strict eligibility rules based on annual turnover. However, healthy cash flows are necessary to reassure repayment capacity.
- Credit history: A good credit score and history of managing credit will work well in your favour. Timely repayments of previous loans are essential.
- Assets: Pledging liquid assets and securities provides the financier with security for approving a demand loan.
Step 2: Assess Your Business Needs
Next, have a clear picture of your financing needs. Factor in aspects like:
- Loan Amount Needed: Determine the exact amount of financing required.
- Purpose of the Loan: Specify the intended use, such as working capital, inventory purchases, or other business needs.
- Desired Repayment Period: Define the preferred duration for repaying the loan.
Having clarity beforehand streamlines the demand loan process. It also shows the seriousness of your loan application to the loan providers, who are assessing it.
Step 3: Choose Between a Secured and an Unsecured Loan
Demand loans are available in two types. Secured loans require you to pledge assets like fixed deposits, mutual funds, or securities as collateral, which allows for higher loan amounts and better interest rates since the lender has security. Unsecured loans don't require any collateral but typically offer lower loan amounts and may have higher interest rates due to increased risk for the lender.
Choose based on your needs and available assets.
Step 4: Prepare Your Documentation
Having all documents ready shows professionalism when applying for a business demand loan. Key documents needed to secure a demand loan include:
- Business registration proof
- Updated bank account statements
- Income tax returns (past 2-3 years)
- Audited financial statements
- Business plan with details of loan requirements and purpose
- Know Your Customer (KYC) documents
Keeping records updated well in advance helps you promptly provide accurate information to the loan providers. Having clear documentation also builds trust and reliability.
Step 5: Compare Lending Companies
Do thorough research to identify and shortlist some of the best lending companies to apply for your demand loan. Compare based on parameters like:
- Interest rates and processing fees - Evaluate the interest rates offered by different lenders, as these directly impact the overall cost of the loan.
- Flexible repayment options - Look for lenders that provide flexible repayment tenures to suit your business cash flow.
- Rate of approval success - Consider the lender’s track record and ease of approval.
- Customer service quality - Assess the quality of customer support, including responsiveness and assistance throughout the loan application and repayment process.
Give preference to lending institutions that specialise in business/MSME loans. They would have dedicated products and processes to disburse demand loans faster to eligible applicants.
Step 6: Apply Through Multiple Channels
You can apply for a demand loan through various channels available:
- Online: Online application via lender website or a loan aggregator platform
- Offline: Direct branch visit application
- Account Managers: Through business banking account managers
However, applying simultaneously across different lending institutions results in multiple credit inquiries, which can directly harm your credit score. So, it is better to avoid multiple applications and choose one lending institution that you feel offers the best solution. Follow up rigorously via calls and visits. Most applications take a few weeks to get fully processed, approved, or rejected.
Step 7: Accept Offer With Most Viable Terms
If your demand loan application process gets approved, do a final comparative assessment of their offer terms. This includes:
- Interest rate
- Fees and additional charges
- Mode of disbursal
- Repayment flexibility
Only accept the offer if it balances both your affordability and business growth needs. Avoid aggressively negotiating terms in the first demand loan application itself. You can build credit for enhanced offers in future renewals/applications.
Step 8: Monitor Utilisation and Plan Repayments
Once sanctioned, the demand loan amount gets disbursed to your linked business account within a few working days. Track repayments right from the start by:
- Track Loan Utilisation: Keeping a separate record of the loan amount utilised
- Avoid Excessive Credit Use: Not overusing the credit limit without urgent need
- Advance Repayment Planning: Planning for repayments well in advance to avoid being cash-strapped.
Sudden repayment notices from loan providers can come at inconvenient times. So, save some extra money and have backup plans ready to make important loan payments on time. Regular monitoring and financial planning help avoid repayment defaults or penalties. They also establish your credit reliability, which makes approving future financing easy.
Conclusion
Getting approved for a flexible but potentially risky financing option like demand loans requires diligent preparation and coordination with lending institutions. Following the demand loan approval steps outlined above, you can effectively evaluate your eligibility, assess your business's financing needs, prepare documentation, compare lenders, and apply through the proper channels.
If approved, closely monitor the utilisation and repayments of the sanctioned demand loan amount. Maintain financial discipline by avoiding overuse of credit limits and plan for repayments in advance to sidestep sudden repayment notices. This also establishes your reliability as a creditworthy borrower for securing future funding.
