What Are Demand Notes?

Publicly traded corporations issue a large variety of debt to raise working capital and funds to meet medium-term and long-term needs. Debt issuance ranges from bonds, which may have five, 10 or even more years until maturity, to short-term paper, which matures in a week. Demand notes, another corporate debt option, is often short term. Demand notes offer individual investors a savings tool with the flexibility of a money market account.

Basics

A demand note is a promissory note that is callable or payable on demand. Unlike most bonds and long-term loans, no default or cause is required for the lender to demand repayment of the loan. A demand note has no fixed term or specified maturity date and can be used for short- or long-term loans. They are typically provided as unsecured, subordinated debt. The interest rates on demand notes are set at the beginning, but generally vary according to contractual terms with periodic adjustments.

Function

Demand notes, in which the corporation is the borrower and the bank or other large financial institution is the lender, provide their borrowers with flexibility, but the borrower must have enough financial resources to repay the note when called. An inability to repay on demand can put the company into financial distress, so demand notes work best when banks and other lending institutions are not motivated to call the loan. As an alternative, many municipalities and publicly traded corporations issue demand notes to the public to raise funds and provide investors with another investment vehicle.

Corporate Demand Notes

Many corporate demand notes are structured as short-term subordinated debt and offered to investors in a format similar to money market accounts. Buyers can often invest with as little as $1,000, obtain check-writing privileges and make smaller follow-on investments of as little as $50. Buyers can also make unlimited purchases and redemptions as long as they do not fall below account minimums. Many of these corporate demand notes, like money market accounts, offer a floating interest rate and daily compounded interest. In general, yields on corporate demand notes exceed that of money market accounts.

Risk Reduction

By issuing demand notes to a number of entities and individuals, municipalities and corporations reduce the risk that all of the proceeds or principal will be called in one lump sum. Institutional and individual investors can purchase these corporate or municipal demand notes directly or through their brokers after reviewing a prospectus. As an investor, there is the risk that the investment could be lost if the corporation issuing the demand notes encounters financial difficulties.

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About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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