A demand loan, also known as a Working Capital Demand Loan (WCDL), is a type of loan in which the loan provider can request repayment at any time. It provides businesses and individuals with quick access to financing while also giving financial institutions more control and flexibility.
In this article, we will look at what exactly demand loans are, their key features, and the significant benefits they offer to both borrowers and lenders. Whether you are considering a demand loan for your business or simply want to learn more about them, read on to understand their unique structure.
What is a Demand Loan?
True to its name, a demand loan is a facility where the lender can request repayment at short notice. These loans are generally short-term and are suited for individuals or businesses needing quick access to funds. Banks and NBFCs retain the right to recall the loan, usually with reasonable notice to the borrower.
Some Key Demand Loans Features
Here are some of the key demand loan characteristics that you should know as an applicant:
1. Short-term financing
Demand loans typically have terms ranging from 7 days to 1 year. They meet immediate or urgent funding needs when longer-term financing is not required.
2. Flexible repayment
There is no fixed repayment structure for a demand loan. The applicant can pay interest regularly and repay part or the full principal as per convenience and cash flow availability.
3. Secured loan
An asset serves as loan collateral if you buy it with a demand loan. These loans are classified as short-term secured loans because they are often taken out for a brief period.
4. Interest is paid on the amount utilised
Interest accrues only on the loan amount utilised by an applicant, not on the entire sanctioned amount. This helps optimise borrowing costs.
5. Pre-payment allowed without charges
Applicants can prepay the demand loan amount ahead of schedule without incurring any penalty or prepayment charges.
Benefits of Demand Loan: Applicants and Loan Providers
Demand loans offer unique advantages, both for the applicants and lenders. Let's examine them in detail:
Benefits for Borrowers
Below are the top advantages of demand loans for applicants:
1. Quick access to financing
Borrowers can receive funds in their accounts within days of applying. The limited documentation and fast processing make these loans convenient for urgent needs or temporary cash crunches.
2. Flexible repayment terms
Fixed Equated Monthly Instalment (EMIs) do not pressure applicants. They can structure repayments according to business seasonality, project milestones and revenue inflows.
3. Lower interest burden
Interest applies only to the utilised amount, not the entire loan sanctioned amount. Repaying quickly also reduces interest outgo.
4. Fund diverse needs
Demand loans offer financing flexibility for managing operational expenses, temporary working capital needs or other business objectives.
Benefits for Lenders
Below are some of the pros of demand loans for banks and NBFCs:
1. Better risk management
The option to demand repayment gives lenders greater comfort in lending to high-risk categories. Risk mitigation capability makes demand loans safer.
2. Interest income starts immediately
As borrowers can utilise as per their requirement, interest income generation starts from day one through interest application on the withdrawn amount.
3. Loan book stability
Rather than committing to long-term loans, lenders can assess economic conditions before deciding to roll over demand loans. This ensures a stable asset-liability position.
4. Scope for cross-selling other products
A good repayment track record on demand loans builds credentials for borrowers. This opens scope for lenders to cross-sell other loans, liability products etc.
Common Purposes of Demand Loans
While demand loans are suitable for diverse needs, some prominent use cases include:
1. Managing operating expenses
When faced with cash flow issues, demand loans help tide over monthly outflows like employee costs, vendor payments, etc., until the business picks up again.
2. Availing bridge financing
Companies can use demand loans as a temporary, short-term financing option while they arrange lower-cost, long-term funds for projects or expansions.
3. Fulfilling urgent orders
Manufacturing businesses can swiftly fund raw material procurement, factory overhead expenses, etc., to meet sudden, high-value client orders.
4. Paying taxes on time
Demand loans help businesses avoid late payment penalties and interest by funding their GST, advance tax, or other dues on time.
5. Managing trading positions
Traders and brokers dealing in equity, commodities, or other market segments can take demand loans from financiers as trading limits to support their margin needs.
Conclusion
Demand loans give both borrowers and lenders the ability to adjust repayment schedules and manage risk as circumstances change. These loans are now widely used by SMEs and traders who need short-term funding. It is important for borrowers to remember that lenders can ask for repayment on short notice, which means some unpredictability. Financial institutions like Shriram Finance have responded by offering demand loan options that balance this flexibility with features designed to build trust and suit different business needs.
