How to Record a Business Loan from a Friend

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Today I was asked a question that boiled down to how to record a business loan from a friend.

In fact after recording the video for this post I received clarification about what had actually happened. Here’s what happened:

  1. Todd, the owner of the business took cash out of his vault at home and loaned it to his friend, Gary.
  2. When Gary paid Todd back he wrote checks to Todd’s company and those checks were deposited into the company’s bank accounts.
  3. In fact 2 checks were written for the repayment of the personal loan. One was posted into checking account #1 and then transferred to the other business checking, and the second was deposited directly into checking # 2.

The way to record this loan to your business can be a bit confusing. We have a repayment of a personal loan where the monies were paid to the business. So is it a loan to your business? It has to be when you think about it, because it’s money that came in, that wasn’t income. So who made the loan to your business? It can’t be Gary, because Gary simply repaid the loan to Todd. That leaves us with one choice. Todd made the loan to your business. In fact it’s no different than if Gary repaid Todd. Todd put the money back in his vault at home, and then made a $10,000 loan to your business by writing his own checks.

The transaction itself here is really simple. The tricky part here is being able to think through the transaction beyond the surface and get to the true substance of the transaction. Gary repaid his loan to Todd. He’s out of the picture. That’s part 1. Part 2 is Todd put that money into your business – hence Todd made a loan to your business. That’s it. Each check that was deposited gets into the bank account with an offset of Due To Todd. In one case a $5,000 check goes into checking #1 and then gets transferred to checking #2. In the second case $5,000 is deposited right into checking #2. In both cases the $5,000 is deposited to “Due To Todd.”

Whenever you put money into your business you are making a loan to your business. It doesn’t matter where you got that money from. You might use your HELOC (Home Equity Line of Credit) to fund your business but that is really two separate loans. The bank lends you (personally) the money and then you in turn decide to make a loan to your business. When you break these transactions up into their separate components it becomes easy to see How to Record a Loan to Your Business from a Friend.

 

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