Lesson 1 of 20 · 6 min
Term one: the line is payable on demand
The facility has no fixed maturity, so repayment can be required without any failure on your part.
The first of the eight terms is the one that shapes all the others. A securities-backed line is typically a demand facility: repayment can be required without a scheduled maturity date.
Track 1 introduced the concept. Here the point is where it lives and what it does to planning. The clause sits in the credit agreement, usually near the front, and it reads as a statement of fact rather than a warning — something to the effect that all amounts outstanding are payable on demand. There is no accompanying explanation, because from the lender's perspective none is needed. It is the defining feature of the product.
What it means operationally: any plan that assumes the facility stays available for a specific number of years is assuming something the agreement does not provide. If you are relying on a line to remain outstanding while an illiquid asset matures, or while a business reaches profitability, the term of that plan is longer than the term of the loan — because the loan has no term.
Reasons a demand can arise that have nothing to do with you:
- The lender revises its appetite for an asset class you hold.
- The lender exits the product or the client segment.
- A regulatory or capital change makes the exposure more expensive to hold.
- A broad reassessment of collateral policy following a market event.
Notice the interaction with everything else in this track. Because the facility can be called at any time and collateral values are set by the lender, the timing of repayment and the value of what would repay it are both outside your control. That combination is what makes the remaining seven terms consequential rather than academic.
Key terms
- Demand facility
- A loan with no scheduled maturity. Repayment can be required at the lender's discretion.
- Tenor mismatch
- The gap between how long you need the money and how long the facility is committed for. On a demand line the committed period is zero.
- Committed versus uncommitted
- A committed facility obliges the lender to lend for a stated period. A demand line is uncommitted, so no such obligation exists.
Worked example
What the term costs, expressed as a plan
A borrower drawing $300,000 intending to repay from an asset expected to be liquid in four years.
- Length of the borrower's plan
- 4 years
- Committed term of the facility
- None
- Years in which the plan and the facility agree
- Only those in which no demand arrives
- If a demand arrives in year two
- Repayment from pledged collateral
- Source of repayment the plan assumed
- The illiquid asset, in year four
- Gap
- Two years, closed by a sale of collateral
The mismatch is not a market risk. It is a structural feature of the product, knowable on the day the agreement is signed.
Check yourself
You have made every payment and your loan-to-value is comfortable. Why does that not protect you from a demand?
Saved in this browser only. No account, nothing sent anywhere.
Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.