Due on Demand Clause- Get it outta here!

Homework time!

1) Open a copy of your operating loan or line of credit agreement.

2) Look for "due on demand" in the pay terms. If you see "due on demand" you'll likely see ", if no demand, on MM/DD/YY" follows right after.

3) If your loan states that it's due on demand, it is likely that you will need to present the outstanding balance as a current liability even if it matures over one year from the balance sheet date. This is because the financial institution, at their own discretion, can make you pay off the loan whenever they wants. So if they chose to, they could make you pay off the loan in less than a year.

(See ASC-470-10-45-9 through ASC 470-10-45-10 for further discussion)

So how do you address this and why does it matter?

Reach out to your banker to see if they can remove the "due on demand" clause. The end result should have no mention of due on demand. For working capital purposes, it's important to limit current liabilities as it could shrink your working capital or result in negative working capital, which is a scenario to steer clear from. A strong working capital is crucial for your bonding capacity.

-Ara

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