What is a business loan?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A business loan is money a business borrows from a bank or other lender and pays back, with interest, over an agreed term. The money borrowed is recorded as a liability. A typical repayment covers interest, usually recorded as an expense, and principal, which reduces the balance still owed to the lender.
The money a lender pays into the business bank account is not income. On the day it arrives, the bank balance and the loan liability both rise by the same amount, so profit does not move. Later repayments work the other way: the principal part lowers the loan balance, and only the interest part reaches the profit and loss statement.
Giving each loan its own liability account makes it simple to follow. Matching that account each month against the lender's statement picks up interest, fees or repayment changes that have not yet been entered, and any difference can be investigated before it carries forward into later months.
Because principal repayments are not expenses, a loan can take more cash out of the business each month than the profit and loss statement suggests, which is why repayments go into the cash flow forecast. How the loan is presented on the balance sheet, and how its costs are treated beyond this plain entry, are questions for your accountant.
In Australia
business.gov.au's glossary treats a loan as an agreement to borrow money and pay it back, with interest, in instalments within a set time.
Its guide to applying for a business loan describes loans as the most common form of finance and suggests understanding your income, expenses, debts and cash flow before you apply. The documents it says a lender may ask for include your business plan, financial reports such as cash flow statements where you have them, and financial forecasts.
Its guide to choosing funding places business loans under debt finance, which it describes as money borrowed from a lender, a bank for example. It says that preparing for a business loan means gathering detailed financial information, such as bank statements, financial statements and cash flow projections.
Worked example
| Date | Entry | Debit (AUD) | Credit (AUD) | Balance owing (AUD) |
|---|---|---|---|---|
| 1 Jul 2026 | Loan paid into the business bank account | 60,000.00 | 60,000.00 | |
| 31 Jul 2026 | Interest charged, from the lender's statement | 325.00 | 60,325.00 | |
| 31 Jul 2026 | Monthly repayment | 1,400.00 | 58,925.00 | |
| 31 Aug 2026 | Interest charged, from the lender's statement | 319.18 | 59,244.18 | |
| 31 Aug 2026 | Monthly repayment | 1,400.00 | 57,844.18 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Recording the loan money as sales or other income when it lands in the bank account.
- Treating the principal part of each repayment as a running cost, which understates profit and leaves the loan overstated in the books.
- Not checking the loan balance in the books against the lender's statement, so interest or fees that were never entered go unnoticed.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.