Business loans and lines of credit: principal, interest, fees, and refinancing

A loan payment has two parts. Interest is the cost of borrowing and is an expense. Principal repays what you borrowed and reduces the liability. Record the full payment, but split it. If you book the whole payment as an expense, profit is understated and the loan balance on the books never falls.

Use the lender's amortization schedule or statement for the split each month, and check the loan balance against the lender's statement.

Proceeds are not income. Record the cash received and a liability for the same amount. If the lender deducts fees at closing, the cash you receive is smaller than the loan. Record the full loan as the liability and the fees separately.

Fees paid to obtain a loan, such as origination fees, are not interest in the usual sense. They are typically recorded as a cost of the loan and spread over its term, instead of being expensed at once. The treatment can differ between your books and your tax return, so keep the closing statement and ask your accountant.

A line of credit lets you borrow up to a limit and repay. Each draw increases the liability, each repayment reduces it, and interest is charged on the balance. Track the balance, the available capacity, and the interest each month. A line that is always drawn to its limit is working as long-term debt, which says something about cash.

A refinance usually pays off an old loan with a new one. On the closing statement, find the payoff of the old loan, accrued interest, any prepayment penalty, the fees on the new loan, and the cash in or out. Record each one: remove the old liability, record the new liability, and put the fees and any penalty in the right accounts. Reconcile the old loan to zero.

Cash back and rewards on business cards reduce your costs or create income. Record them when you receive them, so they are visible and not lost in a bank deposit.