Introduction to Loan Capital
Loan capital is that part of your business finance which is made by way of loans, it is usually secured on business assets and sometimes personal assets of the owner.
The loan capital is provided by a lender and your business is called the borrower. The loan will be subject to lending criteria which need to be satisfied before the loan is made.
Loan capital is normally evidenced by a note or document which specifies the amount, interest rate, and date of repayment. Failure to make repayments on loans can result in penalties or ultimately winding up proceedings against the business.
Short term Loan Capital
Short term loans are repayable in less than one year and are included as part of current liabilities in the balance sheet. They include short term bank loans and overdrafts.
Long term Loan Capital
Long term loans are repayable in more than one year and are included as part of long term liabilities in the balance sheet.
Long term capital normally falls within one of two categories, bank loans or mortgages which are long term loans used to purchase property.
Types of Loan Capital
There are different types of business loans available including:
Fixed rate loans have a fixed interest rate throughout the term of the loan.
Fixed installment loans have fixed amount scheduled repayments made throughout the term of the loan.
Secured loans as the name implies are secured on the assets of the business and on occasions on the personal assets of the owner. A mortgage is a particular type of secured loan which is used to purchase property.
Variable rate loan capital has an interest rate which changes throughout the term of the loan and is usually set in relation to an underlying bank rate such as Base rate or LIBOR.
Unsecured loans do not require any security and includes such items as credit cards and occasionally bank overdrafts.
Convertible loans are loans which can be changed from one type to another during the term of the loan.
How do you record Loan Capital?
Loans are recorded in the General Ledger.
If for example, a business obtains a loan from a lender of 10,000, and the amount is paid into the business current account at the bank, the journal entry would be.
|Bank Current Account||10,000|
This reflects the cash being received into the bank account, and the liability of the business to the lender.