What is a Loan Agreement?

The loan agreement is a contract entered into between the lender and borrower which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending.

The article describes the following:
  1. Loan Agreements for Business Entities

  2. Demand Loan

  3. Benefits of Demand Loans (Borrowers and Lenders)

What are Loan Agreements for Business Entities?

When an enterprise is in the process of starting or expanding, it will definitely require additional funding or capital. These finances can be acquired from financial institutions like banks or a third party willing to loan the money to the business. Where money is loaned to a business, the lender will want to have the borrower sign a loan agreement that explains essential issues regarding the loan.
The important provisions that should be included in a loan agreement are the following:
  • Amount of the loan

  • Schedule of fund release

  • Amount of interest to be charged

  • Documentation of fund release such as a promissory note

  • Repayment terms

  • Rights of prepayment

  • How and when payments are to be made

  • Promises made by the borrower

  • Issues when a lien will be granted to secure funds against any assets

  • Possible loan default

  • Remedies available to lender if borrower default or fails to repay the loan

  • General legal terms

What is a Demand Loan?

A demand loan is a type of short-term loan, with a term of 180 days or less. These loans are not typical because there is no fixed date for the loan repayment. Another feature of demand loans is the floating interest rate that varies depending on the prime rate. The lending institution or person can require the loan repayment at any time. These loans can be secured and unsecured.

Demand loans are usually extended on a more personal arrangement between business partners who know each other for a long time. The idea is that the lender should be assured the loan will be repaid within a reasonable time frame. For this reason, specifics such as the term of the loan are not discussed. If problems occur, the lender has the right to demand the loan repayment immediately.

What are the Benefits of Demand Loans for Borrowers and Lenders?

Demand loans have benefits for the borrower. Borrowers do not worry about loan terms and installments, especially if they have agreed to repay the loan once the project starts making profits. Borrowers make small payments from time to time, but repayment usually takes place when the venture turns profits.

Lenders also benefit from demand loans, as they are both lucrative and secure. The longer it takes the borrower to repay the loan, the more they owe in interest. Demand loans are also secure in case of emergency, the lender can demand repayment rather than wait until a set maturity date. The same is true if they believe there is a chance the borrower falls on hard times or are avoiding repayment.

A demand loan is also a good choice of lenders who want to minimize potential losses. Lenders can demand payments if they suspecting that the borrower will undertake projects resulting in losses.

Advantages for Businesses

Business ventures benefit from demand loans. As an additional advantage, businesses can have two or more loans at a time. This can happen if the borrower has an outstanding payback history. These loans are also easier to qualify compared to standard loans.


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