What is the Difference Between Demand Loans and Installment Loans in Business: Demand Versus Installment Loans in Business

For an entrepreneur or a new business owner, having to take out a loan can present a dilemma. When confronted with different kinds of loans, particularly when it comes to choosing between a demand loan and an installment loan, knowing the difference between the two is important and may prove vital to the survival of your business.

Businessdictionary.com identifies a demand loan as a “loan (such as an overdraft) with or without a fixed maturity date, but which can be recalled anytime (often on a 24-hour notice) by the lender and must be paid in full on the date of demand.” Thus, if you decide to take out a demand loan, you must be prepared to pay it back immediately, at any time the lender makes a demand for it. This may or may not be convenient depending upon the status of your business.  

According to dictionary.com an installment loan is a “consumer or business loan (such as for a vehicle, vacation or equipment) in which the principal and interest are repaid in equal installments at fixed intervals (usually every month).” The risk in taking out an installment loan appears to be far less than that of a demand loan.

One of the advantages with a demand loan is that the business owner or entrepreneur can pay it off at any time and does not have to pay penalties for payments made early, or those incurred when requesting an early payoff. The major disadvantage is that the lender may insist on payment in full, at a time when the borrower is not able to meet that kind of a financial demand. With installment loans, the borrower knows exactly what payment is expected and when it is due every month and thus, can prepare for it in advance. Penalties may result from not meeting installment payments on time. For example, when it is not possible to make a vehicle payment for three months, the lender may recall the vehicle. The same is true for mortgages and that can go into foreclosure.     

Entrepreneurs and other new business owners are often placed in a precarious position financially at first, and may not be aware of how much money they actually need for start-up costs or the difficulty of trying to borrow money without having an existing ‘track record’ of previous financial success. Lenders can be skeptical for the same reasons and may try to secure loans with the borrower’s other assets or property.

Lending and borrowing practices based on moral and ethical standards or principles may allow flexibility in both directions. For example, an entrepreneur who is just starting his or her own business may earn less than expected in the first few months of operation and be able to borrow extra money on installment payments. A vehicle acts as security until the entrepreneur gets on his or her feet financially. In the meantime, he or she may take out a demand loan against his or her house.

An entrepreneur or new business owner may find him or herself, ‘in too deep’ financially, if the business does not succeed, whereas one who realizes the dangers of risk taking in loans, is aware of his or her business potential and generally succeeds. The lender will be more willing to help the entrepreneur or business owner, if he or she can also see the potential and is willing to be flexible. 

In other words, both lending and borrowing practices work, but can be risky. Knowing the lender and his or her reputation for assisting entrepreneurs and new business owners is important. Establishing a mutual, ethical relationship and continuing to maintain it, can help to ensure a successful business. Regardless, obtaining financial counseling is usually a good idea for an entrepreneur or new business owner who decides to borrow money.