Demand loan

A demand loan is a type of loan for which the lender can request full or partial repayment at any given time and for a variety of reasons.

As the name suggests, financial institutions can “demand” repayment of a demand loan within short notice—30, 60 or 90 days.

Demand loans can be secured by collateral, such as land, buildings or equipment.

How does a demand loan work?

Lenders like the reassurance of being able to demand repayment at any time, says Sali Fitzpatrick, Manager of BDC’s Business Centre in Durham, Ontario.

Financial institutions may recall a loan for a variety of reasons, most commonly in response to economic or market downturns.

For example, many financial institutions reduced their participation in sectors such as tourism or transportation during the pandemic, since these sectors were among the most affected by the economic slowdown. In other instances, financial institutions may decide to completely withdraw from a specific sector considered undesirable or high-risk, as a strategic decisions.

Lenders can also decide to recall a loan if they no longer have confidence in the borrower’s financial strength, for example, if the business gets into financial difficulty, misses on its payments or loses a major customer.

“It is important to understand that recalling a loan isn’t necessarily tied to the borrower’s performance,” explains Jonny Loewen, Manager of BDC’s Winnipeg Business Centre.

Whether it’s a mortgage, a line of credit, or a term loan—most business loans on the market are technically demand loans, says Loewen. “A line of credit is always a demand loan, but even longer-term loans often include clauses allowing lenders to recall loans,” he adds.

Most business owners are unaware that they signed up for a demand loan. “You won’t see it highlighted on top of your financial agreement. It is more likely that lenders will highlight when they offer a non-demand loan,” says Loewen.

What happens when a loan is recalled?

A loan recall often creates a snowball effect, impacting your finances and operations. If a financial institution asks you to repay one of your loans, chances are that all the loans you have with that lender will be recalled.

Finding out that you have 90 days to pay down your loan or to find another lender is a shock for any business owner. “It is a life-altering situation that can paralyze and even kill a business,” says Loewen.

He gives the example of a large trucking company from Winnipeg. When they missed a payment on their $7-million line of credit, their chartered bank demanded full payment within 90 days.

“This was a huge blow for the business. The line of credit was their life source,” says Loewen. “Trucking is an industry where payment cycles are long, especially when working with large brokers or shippers, while operating costs—fuel, wages, insurance, tolls—are high and immediate.”

The company tried unsuccessfully to seek financing elsewhere and couldn’t manage to pay down in full the $7 million. “The bank soon decided to also recall their mortgage and the company went bankrupt within a year,” says Loewen.

Demand loan versus non-demand loan

The main difference between a demand loan and a non-demand loan is that the latter cannot be called without due cause. Due cause refers to situations such as providing false information to the lender, bankruptcy, insolvency or using the funds for purposes not agreed in the contract.

This means that non-demand loans cannot be recalled unexpectedly, reducing the risk of sudden disruption due to changing market conditions or lender decisions.

With a demand loan, the lender has more latitude to recall it any given moment and without notice.

“Knowing that you can count on your lender in periods of economic uncertainty and financial strain is incredibly important for business owners,” says Loewen.

Demand loans are offered by the majority of financial institutions in Canada, while non-demand loans—also known as long-term committed loans—are offered only by a handful of financial institutions.

“Crown corporations, such as BDC, some credit unions and smaller financial institutions offer non-demand loans,” says Fitzpatrick.

Are BDC’s loans non-demand?

BDC offers loans to businesses registered in Canada. All BDC loans are non-demand loans, meaning that terms and conditions won’t change without due cause.

As Canada’s development bank, BDC plays a counter-cyclical role. This means stepping up the support when entrepreneurs face challenging market or economic conditions. When the economy takes a hit and other lenders step back, BDC boosts its support to ensure that business owners still have access to the financing they need to keep their business going.

3 key questions to ask before signing for a loan

Here are three key questions that all business owners should ask before signing a loan agreement:

1. Is this a demand loan or a non-demand loan?
   Understand if the loan is contractually guaranteed for a specific period of time or if the lender can demand full repayment at any time.
   
   Entrepreneurs often focus on interest rates when comparing loan options, but the loan’s structure—particularly whether it is a demand or non-demand loan—can have a far greater long-term impact on a business’s stability.
2. Under what circumstances can my loan can be called for repayment? 
   Make sure that you get more than a generic "under special circumstances." Ask for real-life examples of what those special circumstances might be.
3. Where does this information appear in the loan agreement?
   Don’t hesitate to ask a lawyer or advisor to review your contract with the bank if you feel you don’t have a full understanding of the loan terms and conditions.
   
   “Most of the time, entrepreneurs are happy they got their loan approved. It is rare that they look at the full terms and conditions. This is a big mistake,” says Fitzpatrick. “Read the fine print of any loan agreement that you sign. Ask questions.”

How to lower the chances of a loan recall

While there is no specific way to determine whether your loan will be recalled, there are things that business owners can watch out for.

• Pay attention to the economy
  Changes in economic conditions may impact lenders’ risk appetite. Watch out for economic shifts that could prompt financial institutions to trigger loans. Keep an eye on your sector’s risk and be prepared to respond with an adapted business strategy in case of volatility.
• Diversify your financing sources
  Having multiple lenders helps you spread the risk. If one lender demands repayment, others may not follow suit immediately. Also, if you need to refinance a recalled loan within a short period of time, it is easier to approach one of your existing lenders.
• Be transparent with your banker
  If you miss a payment, a large customer or an important business partner, be proactive: call your banker, explain the situation, and try to work out a solution. “Ignoring an issue will not make it disappear,” says Fitzpatrick.
• Stay on top of your finances
  Financial discipline is essential to protect your business from the possibility of having a loan called. “We hear these horror stories of business owners forgetting to make a loan payment. This is something that can definitely trigger loan recalls,” says Fitzpatrick. Keep your financial statements up-to-date and well-organized. “Don’t rely exclusively on your accountant or bookkeeper. As an entrepreneur, you should understand your numbers and your obligations,” she adds.

Fitzpatrick lists a few key financial indicators that bankers keep an eye on (and that you should watch, too, to lower the risk of a loan recall):

• EBITDA
  EBITDA is short for earnings before interest, taxes, depreciation and amortization. It is one of the most widely used measures of a company’s financial health, profitability, value and ability to add debt.
• Current portion of long-term debt (CPLTD)
  The current portion of  long-term debt is the amount of unpaid principal from long-term debt that has accrued in a company’s normal operating cycle (typically less than 12 months).
• Debt-to-capital ratio
  The debt-to-capital ratio is the interest-bearing debt of a company divided by total capital. It is a financial indicator measuring a company's financial leverage.
• Debt-to-equity ratio
  The debt-to-equity ratio is calculated by dividing a company’s total debt, or liabilities, by its total shareholders’ equity. It shows a company’s ability to make payments on its current debt and its capacity to take on new debt.
• Total debt/adjusted EBITDA
  This financial indicator measures how much debt a company has relative to its earnings before interest, taxes, depreciation and amortization (EBITDA).

Next step

Looking to expand into new markets? Develop new products? Protect intellectual property? Launch a marketing campaign? A working capital loan may be right for you.