What’s the Difference Between a Term Loan and Demand Loan?

Millions of entrepreneurs use loans to finance their businesses. A form of debt financing, it provides entrepreneurs with the necessary capital to turn their ideas for a profitable business into a reality. All loans involve borrowing money from a lender. You’ll have to pay back the borrowed amount, typically with interest. But there are different types of loans available, some of which include a term loan and a demand loan.

What’s the Difference Between a Term Loan and Demand Loan?

What Is a Term Loan?

A term loan is a type of loan that’s characterized by a fixed repayment schedule. In other words, you’ll have a specific length of time to pay them back.

Term loans can further be classified as short term or long term. Short-term loans are typically defined as loans with a maximum repayment schedule of one year. Long-term loans, conversely, have a longer repayment schedule consisting of multiple years. Regardless, you’ll have a specific length of time to pay back a term loan.

What Is a Demand Loan?

A demand loan is a type of loan without a fixed repayment schedule. Also known as working capital loans, they can be called upon by the lender at any time. Lenders can call or “demand” that you pay back a demand loan at any time.

Demand loans are typically used to cover short-term expenses. Some businesses use them to cover the cost of new materials or equipment. Other businesses use them to cover the cost of building or property leases. With a demand loan, the lender can require you to pay back the borrowed amount with interest at any time.

Differences Between Term Loans and Demand Loans

Term loans and demand loans aren’t the same. Term loans have a fixed repayment schedule. Depending on whether it’s a short-term or long-term loan, you may have anywhere from a few months to several years to pay back a term loan. Demand loans don’t have a fixed repayment schedule.

Demand loans work like a credit line. You typically won’t get the full amount of a demand loan unless requested. Instead, you can draw funds from the demand loan as needed.

Interest rates also vary between term loans and demand loans. Most term loans have a fixed interest rate. You’ll have to pay this interest rate on the full amount of the term loan. While demand loans often have a fixed interest rate as well, you’ll only have to pay interest on the borrowed amount. If you only draw $50,000 from a term loan with a $200,000 limit, you’ll only pay interest on the $50,000.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.