Congrats on Your New Business Loan
You’ve gotten a loan. That’s exciting!
Maybe you’re just starting out, or maybe you’ve been in business for a while and this represents a major milestone. It might sound strange to be excited about owing someone money, but this could be the moment you finally take a breath and appreciate how far you’ve come.
Getting your business eligible for a business loan has been a long process. The loan application itself was also a long process. Now you’ve finally at the finish line and have been approved for the loan.
Now comes the practical question: How do you record this new loan on your books?
You don’t want to get this wrong. You may have had to submit financial statements to a bank or lender, or you may need them for future financing.
Clean, accurate records matter.
How to Record a Business Loan
When working through transactions like these, breaking them into simple pieces helps you to focus on one thing at a time.
First: You now owe someone money.
That means you have a liability.
Typically, each loan gets its own liability account so you can clearly track balances, terms, and payments over time.
Second: You’ve received cash.
That cash was deposited into your bank account, which increases your assets.
This keeps the accounting equation in balance: Your assets went up, and your liabilities went up by the same amount.
It’s also interesting to note that, at least on paper, your business just got bigger. If your business was a $100,000 company and you received a $50,000 loan, you’re now a $150,000 company overnight.
While numbers can certainly be manipulated, in most cases this moment represents years of work, long hours, planning, and sweat equity finally turning into real momentum.
How to Pay Your Business Loan Back
When you make a loan payment, there are two separate pieces to think about.
1. Principal Payment
The principal portion reduces:
- Your cash (asset)
- Your loan balance (liability)
This is balance sheet activity. As you pay down the loan, your company may look slightly smaller on paper, but ideally, the loan is helping you grow revenue and capacity at the same time.
2. Interest Payment
The interest portion is different, however.
Interest is:
- An expense
- Recorded on your income statement
- The reason the bank made the loan in the first place
This portion reduces your cash and increases expenses, which may have tax implications. Always check with your tax preparer or accountant, but interest expenses are often deductible.
The Bigger Picture
Most loans aren’t paid off quickly. A five-year term is common. Over time, as the liability decreases and cash goes out the door, the nature of your business should be changing too.
Maybe the loan funded new equipment, additional staff, or working capital that allows you to take on more clients. Even though your balance sheet is gradually shrinking in one area, your overall business should be ticking up.
We Can Help
Keeping track of loans, principal balances, and interest payments can be time-consuming. Staying on top of your business is hard enough as it is, so it’s easy to make mistakes when dealing with accurately capturing and maintaining your loan on your books.
That’s where we come in.
At Torline Financials, maintaining clean books for our clients is all we do. Reach out to us today at info@torlinefinancials.com to see how we can help take the load off your plate. You’ll be glad you did.
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