A loan is a sum of money borrowed for a specific purpose at a rate of interest with the promise to repay the amount in the future. Lending institutions offer business loans to entrepreneurs at attractive rates to set up or expand a business.

Demand loans also known as Working Capital Loans are the loans required to be repaid on the demand of the lender. The lender can demand this repayment of the loan any time even at short notice. The primary difference between demand loans and term loans is that demand loans are sanctioned without any fixed duration usually for short-term business requirements. Here are a couple of distinct features and advantages of opting for demand loans:

  • Demand loans are sanctioned to meet short term business requirements such as purchasing or upgrading working capital, raw materials or any other short-term business requirements.
  • The amount and tenure of the loan are decided by the lender and is negotiable.
  • The borrower is required to pay interest only on the percentage of the loan used.
  • The repayment tenure is flexible and the borrowers have the liberty of honouring payments when they have required funds or when demanded by the lender.  The borrower has the liberty to repay the loan in advance without the fear of pre-payments charges or penalties.
  • Demand loans are sanctioned against tangible assets or other securities.

Term loans are sanctioned for a specific tenure and repayment schedule. It is best suited for the long term and capital-intensive requirements.

  • Term loans are sanctioned for large capital requirements like commencing/upgrading a business, purchase of land, equipment etc.
  • These loans have fixed instalments and repayment schedules.  Interest is charged on the entire amount regardless of the amount used and prepayment charges are levied in case the loan is paid back before schedule.
  • Term loans are sanctioned against tangible assets that include machinery, land etc. 

Demand Loan Vs Term Loan

Sr. No.

 Demand Loan  Term Loan

 1

Demand loans, also known as working capital loans are pre-approved lines of credit that are secured in nature.

Term loans can be either secured or unsecured in nature.

2

Demand loans are ideal to meet the needs of raising capital for short-term start-up businesses that can be used to purchase materials, pay salaries, rent, etc.

Term loans are used for large capital expenditures such as the purchase of land, expensive equipment, new business, etc.

3

The interest is only charged on the amount that is actually withdrawn from the account by the borrower.

Interest on term loans is charged on the total sanctioned amount.

4

The repayment tenure of a demand loan can be no less than 7 days and is usually at the behest of the lender.

Repayment tenures of term loans can be for up to 30 years.

Having a clear idea about your short and long-term business goals can help in shortlisting the right loan product. Log into the website of the loan provider and calculate the approximate loan amount you can avail of, instalments payable with the help of a business loan EMI calculator.

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