Small Business Loans

Small business loans can be used to purchase buildings, vehicles, equipment, computers, or even used for emergency cash flow. In your Chart of Accounts, your loans are Liabilities (things you owe). If this is a short-term loan, and will be paid off within a year, tag it as a Short-Term Liability. Usually, though, most small business loans are paid off over a longer term, and will be tagged as Long-Term Liabilities. For example, Mortgage Payable-Local Bank or Note Payable-Ford Taurus. A small business loan is only one side of the equation, though. The purpose of a loan is to buy something - a building or equipment for your business, for example. These are Assets (things you own).

Posting your Loan

Add an account to your Chart of Accounts of "Vehicle-Truck" and one for "Note Payable-Truck".

If you're using a computerized accounting system, enter a journal entry like this:

Vehicle-Truck $25,000
Note Payable-Truck $25,000

If you're using a manual accounting system, and just using a checkbook system like One-Write, write a check for whatever amount you paid down on the vehicle, then make a note on the checkstub of the purchase price and the loan amount, so your CPA can make the entry at year-end.

Now that we have our loan posted, there's 3 other points to discuss.

Amortization

Making payments

Depreciation

Amortization

When you bought your house there was a long, long amortization schedule stuck somewhere in your paperwork. This schedule listed all your mortgage payments, and broke each payment into parts - principal and interest. At any point, you can look at that Amortization Schedule and see how much interest you've paid so far, and how much principal, and how much of the actual loan you've paid off.

Here is a short, simple example. We want to borrow $1,000 at 6% interest, and make 4 payments. We want to know how much the payment will be, how much of each payment is principal, and how much is interest.

You don't need a banker or a CPA for this information, just go online and search for "amortization schedule". Plug in the $1000 loan amount, the 6% interest rate, and 4 for the number of payments. This is what you get:

PMT PRINC INT CUM PRINC CUM INT PRINC BAL
1 244.44 15.00 244.44 15.00 755.56
2 248.11 11.33 492.55 26.33 507.45
3 251.83 7.61 744.38 33.94 255.62
4 255.62 3.83 1000.00 37.77 0.00

The above results tell us a lot of information. We're making 4 payments. For the first payment of 244.44 + 15.00 = 259.44, the schedule tells us 244.44 is principal and 15.00 is interest.

It also tells us the Cumulative Principal and Cumulative Interest is for each payment we make during the life of the loan. Notice the principal goes up with each payment, and the interest goes down.

That's why financial advisors tell you that making extra principal payments early in a loan reaps large benefits, as you save a corresponding larger amount in interest with each extra principal payment.

The schedule also tells you the remaining principal balance of the loan after each payment.

Making and posting Loan Payments

Let's use the example above in our sample Amortization Schedule.

We're going to make our small business loan payment.

If using a computer system, first enter the Vendor - Warm and Fuzzy Bank - to your Vendors.

Now you write the check. There will be 2 lines to this check if you're using a computer system. Enter the first account as Note Payable-Vehicle, and write the principal amount of 244.44. Then enter the second account as Interest Expense of 15.00.

If using a manual system like One-Write, just write the 244.44 under a column for Loan Payments, and a column for Interest. Or, if you have too many columns used already, use 2 columns titled Miscellaneous, and write each amount separately.

Now go ahead and print your check.

I suggest keeping a file folder in your Reference Files for each loan. In this file, keep the original loan paperwork and a copy of your Amortization Schedule. What I do is each month when I make a payment, I highlight that payment on the Amortization Schedule, and write the check number and the date of payment next to it. Then I file the payment stub in my Paid Bills file, which is filed by check number.

Depreciation

The IRS has set up several formulas and means of calculating depreciation - ACRS, MACRS, Straight Line, Double Declining Balance - and several life classes of assets - 7 year, 15 year, 31.5 year, etc.

Let your CPA handle this one. They can calculate this for you each year and give you a monthly journal entry to make, which will decrease your asset and increase your expense, or you can consider it part of your year-end tax return process and let them account for it at year end. That's probably simplest.

That's the way to handle small business loans, put very simply.