How to manage a business loan

Give each loan its own liability account, named so you can tell it apart from any other borrowing. When the money arrives in the bank, record it as an increase in the bank balance and an increase in the loan liability. It is money the business owes, not a sale or other income.

If the lender pays a supplier directly, for example for a vehicle or equipment, record the purchase and the loan together, with no money passing through your bank account. How the asset is treated in the accounts is a question for your accountant, and so are any set-up fees charged when the loan starts.

Keep the loan agreement and repayment schedule with the account, and note the main terms where you will see them:

• the amount borrowed, the term and the repayment dates
• whether the interest rate is fixed or variable. business.gov.au's glossary describes a fixed interest rate as one that doesn't change over the loan term or an agreed period, and a variable rate as one that changes with market conditions
• any asset given as security. The glossary calls an asset encumbered while it is put forward as security for a loan
• any balloon payment and the maturity date, when the term ends and everything still owing falls due.

A regular repayment usually covers two things. business.gov.au's glossary defines principal as how much of the original amount is still owing, with interest left out, and interest as the cost of borrowing money. The principal part of each repayment reduces the loan liability. The interest part is a cost of the business and is recorded as an expense, and so are any account fees.

The interest part usually changes with each repayment as the balance falls, so don't copy the first month's split forward. Take each split from the lender's statement or schedule. A loan with a variable rate can change the repayment amount itself.

When a statement arrives, compare its closing balance with the loan account in your books at the same date. If they differ, look for:

• interest or fees on the statement that haven't been recorded
• a repayment split differently from the statement
• a repayment recorded in the books but not yet processed by the lender
• an extra repayment or a redraw that was missed.

Correct the entries in your books where they are wrong, and leave timing items to clear on the next statement. Don't post a balancing figure to make the two agree: an amount you can't explain is a question for the lender.

business.gov.au's balance sheet template lists loans under long-term liabilities, meaning those due after a year or more, and treats liabilities due within one year as current. When a balance sheet is prepared, the loan balance is often split in two: the principal due over the next 12 months shown as current, and the rest as long-term. Your accountant can confirm the split for each loan.

business.gov.au includes loan repayments in the due dates a business needs to keep on top of, and suggests setting reminders or scheduling payments in advance. Put each repayment into your cash flow forecast in the month it falls due.

• A balloon payment is a final lump sum due on a loan. business.gov.au notes that a larger balloon means lower regular repayments, and its vehicle finance guidance says to plan for that lump sum when the term ends.
• A line of credit lets you borrow up to an approved limit, and business.gov.au says interest is charged only on the amount borrowed, not on the whole limit. Track the amount drawn as a liability, the same as any other loan.
• An overdraft is a line of credit attached to the business bank account. business.gov.au notes that interest is charged on the extra money withdrawn.

An extra repayment reduces principal, so record it against the loan liability. Money redrawn from a loan is new borrowing and increases the liability again.

business.gov.au's glossary describes refinancing as using a new loan to pay off an existing one. In the books, the new loan is set up as its own liability and the old one is shown as paid out, with both accounts agreeing to the lenders' final and opening statements. Any fees or costs charged on the change are a question for your accountant.

Act before a payment is missed: talk to the lender early, with the books up to date so you can show where the business stands. Our guide to managing business debt covers the wider steps.