Meaning
A contractual clause allows a lender to demand immediate and full repayment of an outstanding loan without showing any prior default. When startups use flexible debt facilities, a payment on demand trigger gives the creditor the power to recall the capital at their discretion. This mechanism is common in line of credit agreements where the lender wants to manage its overall exposure to high risk sectors.
Acceleration Event
The lender can activate this clause even if the business has made all its payments on time. This sudden demand for capital can occur due to changes in the lender’s internal policy or broader market conditions. The borrower has a very short period, often just a few days, to return the funds.
Cash Call
The company must find the cash immediately, which can force it to liquidate assets or seek emergency funding. This sudden need for capital can disrupt the company’s operations and halt planned projects. The cash call can also damage the startup’s relationship with its suppliers.
Operational Effect
The threat of this trigger can prevent a startup from making long term investments. Founders must maintain high cash reserves to mitigate the risk of a sudden call. This restriction limits the company’s growth potential.
