Demand Note

A demand note is a loan agreement in which the lender can call for full repayment at any time, without needing to give the borrower advance notice. There is no fixed maturity date. The debt is due whenever the lender demands it. Borrowers accept this structure in exchange for flexible, short-term financing, usually from family members, closely held businesses, or banks offering revolving credit lines.

Think of a demand note like borrowing from a friend under the understanding that they can ask for the money back whenever they need it.

How a Demand Note Differs From a Term Loan

A term loan has a fixed repayment schedule. You know the payment dates, the amounts, and the final maturity date from day one. A demand note has none of that structure. The lender holds the right to call the balance at will, and the borrower must repay immediately or face default.

This asymmetry is the core risk for borrowers. It makes demand notes unsuitable for financing long-term assets. You should not fund a building renovation with a demand note if a repayment demand could arrive before construction finishes.

Common Uses of Demand Notes

Demand notes serve specific financing needs where flexibility matters more than payment certainty.

• Intra-family loans: Parents lend money to adult children under a written demand note to satisfy IRS documentation requirements and establish the transaction as a loan rather than a gift.
• Short-term business financing: Companies borrow from major shareholders or related parties under demand notes to cover temporary cash gaps without a formal lending process.
• Bank call loans: Broker-dealers borrow from banks on a demand basis to fund margin accounts. These are large-scale demand notes that the bank can call if it needs liquidity.
• Bridge financing: Demand notes serve as temporary financing between a known funding event and the closing of permanent capital.

IRS Requirements for Intra-Family Demand Notes

A demand note between family members must charge at least the applicable federal rate (AFR) published monthly by the IRS to be treated as a loan rather than a taxable gift. If the interest rate falls below the AFR, the IRS imputes interest income to the lender and may treat the below-market interest as a gift, triggering gift tax consequences.

Interest on an intra-family demand note must also actually be paid, not just accrued on paper. Documented payments protect both the lender and the borrower if the IRS challenges the transaction's legitimacy.

Key Terms in Any Demand Note

A properly drafted demand note specifies the principal amount, the interest rate and accrual method, who holds the right to demand repayment, and what notice if any is required before the demand becomes effective. Some demand notes specify a minimum notice period, such as five or ten days, even though the lender technically can demand payment at any time.

Written demand notes create a clear paper trail. Oral demand loans exist but are difficult to enforce and create significant tax and legal ambiguity. Any demand note above $10,000 should be in writing, signed by both parties, and kept on file by the lender.

Sources

• https://www.irs.gov/pub/irs-pdf/p550.pdf
• https://www.irs.gov/applicable-federal-rates