How to Record a Business Loan When the Cash Arrives
How to record a business loan comes down to two accounts on the day the wire lands, and neither one sits on the income statement. Debit cash for the proceeds received. Credit a note payable for the same amount.
| Account | Debit | Credit |
|---|---|---|
| Cash | 600,000 | |
| Note payable | 600,000 |
Nothing about the proceeds is revenue, other income, or contributed capital. The obligation to repay offsets the increase in assets, which is also why borrowed funds are excluded from taxable income. The exception is cancellation of debt. If the lender later forgives the balance, the forgiven amount generally becomes income, because the offsetting obligation is gone.
That part is straightforward. The trouble shows up nine months later, when a controller opens the loan account and finds a year of payments posted to one expense line, or a $120,000 final payment fee nobody accrued, the same week the lender asks for a covenant certificate.
Three details get skipped at funding.
- Net proceeds are not the face amount. Lenders routinely fund net of an origination fee. If a $600,000 term loan funds $594,000 because the lender withheld 1%, the note payable is still $600,000 and the $6,000 is an issuance cost, not a bank charge. Booking the note at $594,000 understates both the liability and the interest expense.
- One note payable account per facility. A single loans payable bucket holding an SBA term loan, an equipment note, and a revolver turns every period-end reclassification and every lender tie-out into guesswork.
- Restricted cash stays restricted. If part of the proceeds sits in a controlled account pending a milestone, present it as restricted rather than folding it into operating cash.
Then build the debt schedule, the same day the facility closes. Per facility it carries original principal, stated rate and index, maturity, payment amount and date, the interest-only end date, capitalized issuance costs and the unamortized balance, any final payment fee accrual, and the covenant test dates. Everything else on this page reads off that schedule.
This page is about booking debt you already have, not choosing it. If you’re still weighing options, we cover short-term business loans and the 2026 business lending market separately.
Splitting the Balance Into Current and Long-Term
The current portion of long-term debt is the principal scheduled to be repaid within twelve months of the balance sheet date. Everything beyond that stays non-current. ASC 470-10-20 draws the line at one year, or at the operating cycle where that applies.
The reclassification is a balance sheet entry only. It never touches income.
| Account | Debit | Credit |
|---|---|---|
| Note payable, long-term | 99,484 | |
| Current portion of long-term debt | 99,484 |
Run one facility as the thread. A $600,000 term loan at 9%, fully amortizing over 60 monthly payments, carries a payment of $12,454.
- Month 1 interest is $600,000 times 0.0075, or $4,500.
- Month 1 principal is the rest of the payment, $7,954.
- The balance after twelve payments is $500,516.
- Principal retired in the next twelve months is $99,484.
At the first period end, $99,484 is current and $500,516 is non-current. Twelve months later the current portion is roughly $108,218, because each payment carries more principal than the last.
The number grows every year.
A finance team that sets the reclass once and lets it ride is wrong by the second year. And the split isn’t housekeeping, it’s the number your lender reads. Take a company with $800,000 of current assets and $400,000 of current liabilities, a current ratio of 2.0. Move $200,000 of principal into the current portion and it falls to 1.33 without a dollar leaving the building. Minimum current ratio is a standard maintenance covenant, so a reclassification treated as tidy-up can trip a test. We cover liquidity and solvency ratios separately.
Two failure modes do the most damage:
- The whole payment goes to expense. The liability never comes down, so debt and expense are both overstated, and EBITDA comes in low. That’s the metric a growth lender underwrites.
- The whole payment goes to principal. The liability comes down correctly and interest expense is zero, so fixed charge coverage rests on a number that doesn’t exist. This one survives a bank reconciliation, which is why it hides for quarters.
Interest-only periods change the answer. With no principal scheduled in the next twelve months, the current portion can legitimately be zero. When that period ends inside the window, the current portion jumps from zero to a large number in one quarter. Put the end date on the close calendar.
A covenant breach forces the move. Under ASC 470-10-45-11, long-term debt becomes current if it is or will be callable by the creditor because of a violation at the balance sheet date. Two narrow escapes exist. Debt may stay non-current where the agreement has a grace period and a cure within it is probable. A waiver works only if the lender gives up its right to demand repayment for more than one year, as Deloitte’s roadmap on credit-related covenant violations walks through. Finance teams ask for the wrong waiver constantly. A letter that clears the current test and leaves the same covenant in place for next quarter won’t get the debt back off the current line.
Every Payment Is Two Numbers, Not One
Every payment on a term loan is two numbers, and only one of them is an expense. Interest expense for the period, and a reduction of principal. The lender’s amortization schedule decides the mix, and the mix moves every month.
That split is also what the tax return needs. The principal portion isn’t deductible, because repaying a liability isn’t an expense. The interest portion generally is, subject to section 163(j). Where the limitation applies, deductible business interest expense can’t exceed business interest income plus 30% of adjusted taxable income plus floor plan financing interest expense. Most companies in the $1M to $20M revenue range are out of scope. A taxpayer that isn’t a tax shelter and that meets the section 448(c) gross receipts test is an exempt small business, and the IRS puts the inflation-adjusted threshold at $32 million of average annual gross receipts for tax year 2026, up from $31 million for 2025. The thing to watch is aggregation, because gross receipts of related entities under common control get combined and can push a group of small-looking entities over the line.
Book and tax also diverge on the fees. For book purposes, issuance costs amortize to interest expense. For tax, Regs. Sec. 1.263(a)-5 requires capitalizing costs that facilitate a borrowing, and Regs. Sec. 1.446-5 treats them as a reduction of the issue price, which creates original issue discount deducted over the term. Same facility, two schedules, one real deferred tax item. That reconciliation belongs inside the monthly accounting work, not in a March scramble.
Interest, Principal, and the Lender’s Schedule
The loan payment journal entry has three lines.
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 4,500 | |
| Note payable | 7,954 | |
| Cash | 12,454 |
On a level-payment loan, interest equals the opening principal balance times the periodic rate, and principal is whatever is left of the payment. Pull it from the lender’s schedule rather than a plug. Four rules keep that honest.
- Tie out to the lender every month. The debt schedule balance, the GL note payable balance, and the lender’s statement balance should agree to the dollar before the close is signed. A variance usually means a payment posted gross to one account, or a fee swept out of the operating account and coded to bank charges.
- Reprice floating facilities by period. A facility priced at SOFR plus a spread, or Prime plus a spread with a floor, changes the interest amount monthly. Pull the statement instead of assuming last month’s schedule holds.
- Accrue through period end. When the payment date and the close date differ, accrue the days between by debiting interest expense and crediting interest payable, the same discipline you’d apply to any other accrued expense.
- Watch PIK. Payment-in-kind interest is expense in the period and an increase in the principal balance, not a cash item. If the agreement capitalizes it, the debt schedule has to grow with it or the tie-out drifts all year.
Origination Fees, Warrants, and Closing Costs
Loan origination fee amortization is the most reliably botched part of this page, and it goes wrong in the same direction every time. The fee isn’t a prepaid asset.
Under ASC 835-30-45-1A, debt issuance costs on a recognized debt liability are presented as a direct deduction from the carrying amount of that liability. FASB’s ASU 2015-03 made that change in April 2015, and it has applied to private companies for fiscal years beginning after December 15, 2015. Before it, these costs sat as a deferred charge, an asset, and plenty of charts of accounts still carry a deferred financing costs line left over from that convention.
Take the same $600,000 loan with $12,000 of origination fee and reimbursed lender legal costs.
| Account | Debit | Credit |
|---|---|---|
| Cash | 588,000 | |
| Debt issuance costs (contra-liability) | 12,000 | |
| Note payable | 600,000 |
The balance sheet shows a net carrying amount of $588,000, split between current and non-current. Each month, $200 moves from debt issuance costs into interest expense. ASC 835-30-35-2 calls for the interest method, and ASC 835-30-35-4 permits straight-line where the result isn’t materially different, which most middle-market term loans clear. Document that conclusion instead of defaulting into it.
What capitalizes: document preparation, placement agent fees, registration fees, lender legal fees the borrower reimburses, the borrower’s own transaction counsel on the financing, and any appraisal the lender requires to close. General corporate advisory work invoiced the same week is a period expense.
Warrants turn the funding entry into an allocation. Under ASC 470-20-25-2, proceeds from debt issued with detachable warrants are allocated between the two on their relative fair values at issuance. As an illustration, a company draws $3,000,000, the debt without the warrants is worth $2,900,000, and the warrants are worth $200,000. The debt share is 93.55% of the $3,100,000 combined, so $2,806,452 lands on the note and the $193,548 remainder is a debt discount, with the same amount credited to additional paid-in capital for equity-classified warrants. That discount accretes to interest expense over the term, which puts the effective cost of the facility well above the coupon. That is the number the board should see.
Classification is a judgment, not a default. Warrants that fail the equity conditions, one with a cash settlement feature or one over redeemable preferred stock, are liabilities remeasured at fair value through earnings every period. The warrant needs a fair value too, which ties this entry to your cap table and 409A work.
Back-end fees are the last trap. A final payment fee is a known contractual amount, so it accrues over the term as additional interest expense. On a $3,000,000 facility with a 4% final payment fee over 48 months, that’s $120,000 total and $2,500 a month. Book it at payoff instead and one month absorbs the whole charge. Prepayment penalties are different. They’re contingent on an action the company hasn’t taken, so they’re recognized when the prepayment happens, generally inside the loss on extinguishment with the unamortized issuance costs and discount written off that day. For scale, Hercules Capital’s fiscal 2023 Form 10-K describes venture loans with exit fees, balloon payment fees, and PIK provisions, interest-only periods of three to eighteen months or longer, and rates running roughly 8% to 18% as of December 31, 2023.
Credit Lines and Revenue-Based Financing
Line of credit accounting starts out simple and then breaks the rule you just learned. A draw isn’t revenue and a repayment isn’t an expense. Drawing $250,000 debits cash and credits line of credit payable, and repaying $100,000 does the reverse. Interest is accrued and expensed separately, usually monthly in arrears on the average outstanding balance.
A revolver balance is usually current, because the borrower can be required to repay inside a year and the facility funds working capital. That isn’t automatic. A multi-year committed facility where the company has the intent and the ability to leave the balance outstanding past twelve months supports non-current classification. Document the reasoning.
Then comes the part almost nobody covers, because they apply ASU 2015-03 to everything. It doesn’t reach lines of credit. ASU 2015-15 codified an SEC staff announcement with the opposite presentation. Costs related to a line-of-credit arrangement may be deferred and presented as an asset, amortized straight-line over the term of the arrangement, whether or not there are any outstanding borrowings. The citation is ASC 835-30-S45-1, and the deferred asset is non-current unless the commitment period runs less than a year. So the same company, in the same month, can carry a revolver arrangement fee as an asset and a term loan’s issuance costs as a contra-liability.
Both correct.
Two fees, two treatments. Credit agreements separate an upfront commitment or facility fee, typically fully earned and non-refundable on the effective date, from a recurring unused line fee computed as a percentage per annum of the average undrawn portion, payable in arrears. The upfront fee is deferred and amortized over the facility term. The unused line fee is the cost of that period’s unused capacity, expensed as incurred.
One presentation note. Revolver borrowings and repayments belong gross in financing activities unless the original maturity of the borrowings is three months or less. ASC 230-10-45-8 reserves net reporting for quick turnover, large amounts, and short maturities.
Revenue-based financing has no stated coupon, so the entries follow the economics. A company receives $250,000, agrees to remit $325,000 out of a fixed percentage of collections, and the $75,000 difference is financing cost. The proceeds are a liability on receipt, not revenue, and gross revenue is still recorded in full when earned, because the remittance is a use of cash rather than a reduction of the sale. ASC 470-10-25-1 covers sales of future revenue, and the factors in 25-2, continuing involvement, a limited investor return, recourse, and cancelability by lump sum, each create a rebuttable presumption of debt classification. Most growth-stage facilities and merchant cash advances hit several. Subsequent measurement is the audit-sensitive judgment. Derive an effective rate from the proceeds and the projected outflows, then apply one documented approach every time the estimate changes. Whether to take the advance is a separate question, and our merchant cash advance FAQ covers that.
Shareholder and related-party advances need one thing the others don’t. A written note, with principal, rate, repayment schedule, maturity, and security. ASC 850 disclosure requires the terms and the amounts due, and nobody can disclose terms that were never written. Section 7872 also measures below-market shareholder loans against the applicable federal rate. The familiar failure is a due-to-officer balance that sits for three years until a diligence team reclassifies it as a capital contribution.
CPA-Led vs Bookkeeper-Led
A bookkeeper-level process handles the recurring half of this page well. Posting the funding entry. Entering the payment split off a lender amortization schedule. Reconciling the loan account to the bank feed. Flagging a changed payment amount. None of that is trivial, and none of it is where debt accounting fails.
It fails one level up, where every judgment on this page lives.
| Decision | What it actually takes |
|---|---|
| Is a closing cost an issuance cost or a period expense | Reading the engagement letters and the credit agreement against ASC 835-30 and Regs. Sec. 1.263(a)-5 |
| Is the warrant equity or a liability | The freestanding instrument and equity classification analysis, plus a fair value for the warrant |
| How much of the proceeds belongs to the warrants | A valuation input and an ASC 470-20-25-2 relative fair value computation |
| Does a covenant breach force current classification | Reading the waiver letter against the ASC 470-10-45-11 conditions and the forward twelve-month test |
| Is a revenue-based facility debt or deferred income | Walking the ASC 470-10-25-2 factors against the actual contract |
| Accrue the final payment fee or take it at payoff | A term-by-term read of the fee trigger |
| Does section 163(j) apply after aggregation | Section 448(c) gross receipts aggregation across related entities |
Each of those is a conclusion somebody has to reach and document, not a transaction to post. A bookkeeper-only engagement usually gets the first week of the month right and the first covenant certificate wrong.
You’re not just buying two skill sets here, you’re buying a second review layer. The entries are bookkeeping. The classifications, the allocations, and the disclosures are accounting and tax. Split those across two vendors and the debt schedule belongs to nobody, which is how a $120,000 final payment fee lands in a single month and how an undocumented founder advance survives three closes. Indinero runs online bookkeeping services with CPA review on every close, so the fee question reaches the same team that posts the entry.
How Indinero Keeps Debt Tied to the Lender’s Numbers
The test is plain. Your general ledger should agree with what the lender thinks it’s owed, every month, without anyone reconstructing it from a bank feed. That is the control, and it runs on a loop.
- Debt schedule first, GL second. Every facility carries a standing schedule with original principal, rate and index, maturity, payment amount, interest-only end date, capitalized issuance costs and unamortized balance, and covenant test dates.
- Three-way tie-out. The schedule balance, the GL note payable balance net of unamortized issuance costs, and the lender statement agree before the close is signed. A variance gets explained, not plugged.
- Payment split from the lender’s schedule. Interest and principal come off the lender’s amortization table, recalculated when a floating rate resets.
- Period-end reclassification. The next twelve months of scheduled principal moves into the current portion, recomputed every period because the number grows.
- Issuance cost and discount amortization. Posted to interest expense on the documented method, with the unamortized balance carried forward.
- Accrual items. Final payment fees accrued ratably, interest accrued through period end, PIK capitalized into principal where the agreement requires it.
- Covenant calendar. Test dates sit on the month-end close checklist ahead of the certificate due date, so a classification question surfaces before the financials are issued.
- Tax coordination in the same engagement. The interest figure on the return is the figure that came out of the close, and the book-to-tax difference on issuance costs is tracked rather than rediscovered in March.
The handoff that doesn’t happen is the point. Bookkeeping, accounting, tax, and fractional CFO advisory sit under one engagement at indinero, so the warrant allocation doesn’t wait for a second firm to be briefed and the section 163(j) question doesn’t start with someone re-reading the credit agreement. Pricing starts at $750/mo, month-to-month engagements are available, and indinero has maintained continuous operations since 2009 with a 5-star Clutch rating and SOC 2 compliance in 2026.
Debt accounting isn’t hard. It’s just unforgiving about being left until the end of the month.
Frequently asked questions
The same handful of debt questions come up on close calls every month. Whether a loan payment is an expense, why the GL balance drifts from the lender statement, where origination fees and legal costs belong, and what a covenant breach does to the balance sheet. The answers below cover the ones finance teams ask most, with the entry or the citation you’d need to defend the treatment.
Why does our loan balance never match the lender’s statement?
A loan balance drifts from the lender’s statement when payments post gross to one account instead of splitting between interest expense and principal. Fees swept from the operating account and coded to bank charges cause the same variance. A monthly three-way tie-out fixes it, and indinero ties the debt schedule balance, the general ledger note payable net of unamortized issuance costs, and the lender statement to the dollar before signing a close.
Is a loan payment an expense?
A loan payment isn’t an expense, because only the interest portion is expense and the principal portion reduces the loan liability. Posting the whole payment to one expense line overstates both debt and expense, and it pushes EBITDA low, which is the metric a growth lender underwrites. Pull the split from the lender’s amortization schedule every month, because the mix of interest and principal moves with each payment.
Do we have to move the current portion every month?
The current portion of long-term debt is a period-end reclassification of the next twelve months of scheduled principal, not a monthly bookkeeping chore. Recompute it every period, though, because the number grows as each payment carries more principal than the last. On a $600,000 term loan at 9% over 60 months, the current portion is $99,484 at the first period end and roughly $108,218 a year later, so a reclass set once and left alone is wrong by year two.
Where do origination fees and legal costs belong?
Origination fees and legal costs on a term loan are a direct deduction from the carrying amount of the debt, not a prepaid asset. ASU 2015-03 made that presentation, and the costs amortize into interest expense over the term, so a $600,000 loan with $12,000 of fees carries at $588,000 and moves $200 a month. Costs on a line of credit follow the ASU 2015-15 carve-out instead, deferred as an asset and amortized straight-line over the facility term.
How is a draw on a credit line different from a term loan?
A credit line draw has no amortization schedule, so the revolver balance is usually current because repayment can be required inside a year. A term loan instead splits by maturity, with the next twelve months of scheduled principal in the current portion and interest coming off a level payment. On a line, interest accrues on the average outstanding balance, usually monthly in arrears, and current classification isn’t automatic for a multi-year committed facility the company intends to keep outstanding.
Does a covenant breach change how the debt is reported?
A covenant breach can force long-term debt onto the current line under ASC 470-10-45-11, when the violation makes the debt callable by the creditor. That’s a reporting outcome, not just a lender conversation, and it can drop a current ratio below a maintenance covenant without a dollar leaving the building. Two narrow escapes exist, a probable cure inside a contractual grace period, or a waiver where the lender gives up its right to demand repayment for more than one year.
Is interest on a business loan fully deductible?
Interest on a business loan is generally deductible, subject to section 163(j), which exempts small businesses meeting the section 448(c) gross receipts test. For tax year 2026 that threshold is $32 million of average annual gross receipts, so most companies in the $1M to $20M revenue band are out of scope. The real trap is aggregation, because gross receipts of related entities under common control get combined, which is why indinero keeps the 163(j) question inside the same engagement as the close.
