Business Loan Record Keeping

The day the loan settles is easy bookkeeping: money in. Then the repayments start, and every month a single direct debit quietly bundles together two very different things — principal, which is just giving the lender its money back, and interest, which is the cost of borrowing. Code them as one and the books are wrong in both directions at once.

Principal and interest are not the same thing

The loan itself is not income when it arrives, and the principal portion of each repayment is not an expense when it leaves. Only the interest — and only to the extent the borrowed money was used for business purposes — is generally deductible. Getting the split right needs the lender's loan statement or amortisation schedule, because the mix changes every month: early repayments are mostly interest, later ones mostly principal. The loan liability in your accounting file should agree with the lender's closing balance at year end, and when it does not, the difference is almost always interest coded wrongly or repayments booked entirely to one side.

Redraw and refinance change the story

Deductibility follows the use of the money, not the account it came from or the asset securing it. Redraw funds from a business loan to pay for a family holiday, and the interest on that portion generally stops being deductible — and the tracking obligation is yours, not the bank's. Refinancing works on the same logic: what matters is what the original borrowing funded. Mixed-purpose loans need an apportionment you can show on paper, and the cleanest answer is usually structural — keep business borrowing and private borrowing in separate facilities so the question never gets complicated in the first place.

Equipment finance needs its own paper trail

Vehicles and equipment are often financed under a chattel mortgage, hire purchase or lease, and the accounting and GST treatment differ between them — worth confirming which product you actually signed before the next BAS is lodged. Whatever the product, keep the finance agreement, the repayment schedule, the tax invoice for the asset itself, and any payout letter when the loan ends or the asset is traded in. These documents drive the asset's cost, the depreciation claims, the interest deductions and the GST position, and they are the first things a review — or a buyer's due diligence — will ask for.

What we commonly see go wrong

• The entire repayment coded to interest expense, overstating deductions and leaving the loan balance frozen at settlement value.
• The entire repayment coded against the loan balance, silently losing the interest deduction the business was entitled to.
• Redraws used for private purposes with no record of the split, discovered only when someone asks.
• Finance documents lost after settlement, so the asset's cost and the GST claimed can no longer be substantiated.
• Loan balances in the software never reconciled to the lender's statements, sometimes for years at a stretch.

A worked example

As an illustration: a landscaping business buys a ute under a chattel mortgage. The right treatment records the ute as an asset and the finance as a liability, claims depreciation on the vehicle and a deduction for the interest, and handles the GST according to the finance type. Instead, the monthly repayment is coded to motor vehicle expenses. Profit is misstated, the loan never reduces in the books, no depreciation schedule exists, and unwinding it at year end costs more than booking it properly at settlement ever would have. One correctly recorded loan on day one prevents all of it.

When to get help

Loan and finance records generally need to be kept for at least 5 years, and for financed assets it is safest to keep them for as long as you own the asset and beyond. If your loan balances do not match the lender's statements, if a redraw has mixed business and private use, or if you are not sure what type of finance you actually signed, it is worth having it set up correctly once — the interest deduction is real money, and so is the cost of claiming it wrongly.

Is my business loan repayment tax deductible?

Only the interest component, and only to the extent the borrowed funds were used for business purposes. The principal portion is repayment of debt, not an expense.

How long should I keep loan and finance documents?

Generally at least 5 years, and for financed assets it is safest to keep the documents for as long as you own the asset and for the record-keeping period after disposal.

What happens if I redraw from a business loan for personal spending?

The interest on the private portion generally stops being deductible, and the responsibility for tracking the split sits with you. Keeping business and private borrowing in separate facilities avoids the problem entirely.