A demand loan is a loan that the lender can require to be repaid in full at any time, with little or no notice, regardless of whether the borrower has made all scheduled payments.
Most Canadian business operating lines are technically demand facilities. The credit agreement grants the lender the right to demand repayment without cause, which means the loan can be called even when the business is performing well and all payments are current. This is not widely understood by business owners who assume that making payments on time provides protection against the loan being called.
In practice, lenders rarely exercise the demand right without reason. Doing so would damage the relationship and their reputation. However, the right is used when the business deteriorates, the lender’s risk appetite changes, or the relationship breaks down. Understanding that an operating line is a demand facility, not a committed term facility, shapes how a business manages its liquidity and its relationship with its bank.
See also: Credit Facility · Operating Line of Credit · Personal GuaranteeThe difference between a demand facility and a committed one matters most when certainty is required. See how Wefinx approaches Virtual CFO services.