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What You Need to Know About Loans With Due on Demand Provisions
A borrower should focus on many details when negotiating a loan:
- What are the payment terms?
- What is the interest rate?
- What is securing the debt?
- Is anyone personally guaranteeing the debt?
- What are the financial and non-financial covenants?
- What constitutes an event of default?
But a frequently missed provision that is being included in some loan documents is one that states “This loan is payable on demand”. This provision for a lender is even better than an acceleration clause that allows the lender to demand repayment of the loan if the borrower violates contractual provisions of the loan document. This provision allows the lender to demand repayment at any time; if rates are increasing and the loan’s current rate is below market, if the economy is in a downturn or even if the lender just wants to reduce their risk.
This provision would require the loan to be classified as a current liability on the borrower’s financials. It does not matter if there are payment terms that extend out beyond 12 months or at the execution of the loan document the intention of the lender is to follow the payment terms until payoff of the loan. Be aware of this provision as well as all the other provisions in a loan document before executing the document.
If you have any questions, please reach out to your BGM contact or Jason Marvin at [email protected] or (952) 844-2531.
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