USA Long Term Loan on Balance Sheet

[ttbell]

Hello all,
I am getting a long term loan for my company but it will be spent during the first year on mostly payroll. How would you put that in the balance sheet.
The liability will still be there as a long term liability after close, but the counterpart is not really an asset; As in we arent going to buy equipment, or build inventory with it. Would this be a case of an off balance sheet liability.
Any insight would be greatly appreciated.
T

 

[BIG E]

Then it's not a long term liability. So long as the remaining balance will be paid off within 12 months, the entire amount should be shown as short term.

 

[ttbell]

Thank you, but the loan will be paid over 10 years, so it is a long term liability. It will be however mostly spent during the first year on payroll.

 

[BIG E]

Long term financing for a short term purpose is not really a wise financial decision for a business.
You'll be paying interest expense unnecessarily.

 

[ttbell]

It is indeed. However the interest is like 2%, its like a government subsidized loan and it is unsecured. Big portion of it will go to payroll, some will go to renovation of the space.
So would this be an off balance sheet expense for the payroll portion. That's still up in the air.
Thanks

 

[DrStrangeLove]

It doesn't seem like it would be off balance sheet. That you will spend the funds on payroll doesn't affect whether the loan appears on the balance sheet. These loans are being made to your company directly, right? They aren't being passed through another shell entity, correct? Then they'd appear on your balance sheet, and change your metrics (like your debt/equity ratio).

 

[ttbell]

Thanks for your message. alright, so we all agree it will go on the balance sheet. But do we agree that it is NOT an asset. If it isnt an asset, then we still need to somehow "balance" the balance sheet lol. Thnks

 

[BIG E]

How can money that you are borrowing be an asset?
You've been advised that it's a long term liability.
Once you have the cash, the items you pay for such as payroll show up as expenses for the Profit and Loss Statement (Income Statement) if they are not inventory or fixed assets.

 

[ttbell]

I think I found the perfect explanation online to my special case. usually with long term loans, you create a cash asset on the balance sheet along with a long term liability. The cash eventually is invested into a tangible or intangible asset.
In my special case, financing working capital with my long term loan; a short term liability already exists in wages. As you borrow this money, you are simply moving that short term liability into a long term liability. No assets are created.
Its not very common, but when the government offers you an interest free loan over a decade, well you use it where you need to
Thanks

 

[DrStrangeLove]

Not quite. You're getting an asset (the loaned cash) along with the liability (the loan). Investing in tangible or intangible assets has nothing to do with it; you can borrow long-term to fund working capital without investing any of the borrowed funds in fixed or intangible assets.

You aren't "moving" a short-term liability into a long-term liability. You're using the cash you're borrowing to pay the wages you owe.