A demand note is a type of financial instrument that represents a debt owed by one party to another.
It is a written promise to repay a specified sum of money at a certain time and is usually used for short-term borrowing needs. The “demand” feature of a demand note means that the lender has the right to demand payment at any time, without prior notice.
Demand notes are often used by individuals or businesses when they require a quick infusion of cash for a specific purpose, such as financing a new project, paying for unexpected expenses, or addressing a temporary cash flow shortage.
Unlike a traditional loan, a demand note does not have a fixed repayment schedule, and the borrower is expected to repay the debt as soon as they are able to do so.
Demand notes are unsecured, meaning they are not backed by collateral such as property or other assets. This means that the lender is taking on more risk than with a secured loan, and as a result, demand notes are typically issued with higher interest rates.
The interest rate on a demand note is usually a variable rate, which means that it can change over time based on market conditions.
The process of issuing a demand note involves the borrower and the lender agreeing on the terms of the loan, including the amount of money to be borrowed, the interest rate, and the repayment schedule (if any).
The borrower then signs the demand note and the lender keeps it on file as evidence of the debt. The borrower is then expected to repay the debt on demand, either in full or in installments.
In some cases, a demand note may be convertible into other securities, such as stocks or bonds. This means that the borrower has the option to convert the debt into equity in the company, which can be attractive to some investors who are looking for an alternative way to invest in a company’s growth.