What is loan receivable and how does it work?

When a bank or lender provides a loan, it isn’t just handing out money. It’s investing.

Think of this amount as a lender’s version of "money in transit." When a lender issues a loan, it doesn’t just give cash. Instead, it records that as an asset and expects payment with interest.

Accounting for loan receivables is essential, as they are the backbone of financial institutions. They help maintain steady cash flow and accurate balance sheets. Understanding loan receivables helps businesses, investors, and accountants make informed financial decisions while keeping the numbers in check.

The EY Item Club forecasts that bank-to-business lending will grow by just 0.5% (net) this year before increasing to 2.8% (net) in 2025, driven by lower borrowing costs stimulating demand¹. This figure suggests that businesses may be holding back on borrowing in the short term due to economic uncertainty or higher costs. But, the forecasted rebound in 2025 reflects improved business confidence and a more favorable lending environment.

If you’re a UK financial institute who wants to monitor their loans better and keep their accounts at their optimal condition, you’ve landed on the right page. We’ll walk you through the basics of loan receivables and how they work. You’ll also find out how Wise Business, a non-banking alternative can help receive those loan payments from local and international partners with ease.

What is a loan receivable?

A loan receivable is the amount a borrower owes to a lender, typically a bank or credit union. It is recorded as an asset in the lender's books, specifically under the loan receivable journal entry in the general ledger.

This entry tracks the outstanding loan amount and helps with accurate financial reporting. Just like other accounting processes, managing loan receivables requires a transparent approach. The main aspects included in the loan receivables journal entry are:

• First loan entry: This is when the lender records the loan as receivable, increasing its assets.
• Interest accrual: As time passes, interest is added to reflect earnings from the loan.
• Tracking repayments: Each payment from the borrower reduces the loan balance while recording interest income.

Detailed loan receivable journal entries are the financial institution's roadmap. Clear records and tracking every repayment help maintain a steady cash flow.

Examples of loan receivable

Suppose BrightTech Ltd., a UK-based software company, secures a £50,000 business loan from a bank to fund its expansion. The bank records this amount as a loan receivable, anticipating repayment over time and interest. Suppose the loan has a 5% annual interest rate (the terms of the interest rate and timeframe depend on the agreement between the two parties).

The bank’s finance team records an initial journal entry:

• Debit: Loan Receivable (£50,000) → Increases the bank’s assets.
• Credit: Cash (£50,000) → Reflects the disbursement of funds.

Each month, the team records accrued interest as income:

• Debit: Interest Receivable (£208) → Represents earned but unpaid interest.
• Credit: Interest Income (£208) → Adds to the bank’s revenue.
  (Calculated as £50,000 × 5% ÷ 12 months = £208)

If BrightTech Ltd. repays £2,000 in a given month, the finance team updates the books:

• Debit: Cash (£2,000) → Reflects money received.
• Credit: Loan Receivable (£1,792) → Reduces outstanding loan balance.
• Credit: Interest Receivable (£208) → Recognizes earned interest.

Accurate record-keeping allows the finance teams to identify delinquencies early and monitor repayment schedules. It enhances their risk-management strategy and helps them scale their profits.

How to record a loan receivable in accounting?

A bank or a lender should ideally use a double-entry system for their transactions. This system requires a well-rounded bookkeeping process. Each entry added to the system should have a corresponding entry. Such a system produces accurate results and helps spot even minor loopholes.

In the example above, we saw that the process starts with loan issuance, where the lender debits the accounts receivable loan and credits cash, reflecting the disbursement of funds. As the interest accrues, it is recorded as interest receivable, increasing revenue.

Later, when the borrower makes a payment, the lender updates the books by crediting the “Loan Receivable” and “Interest Receivable” accounts while debiting cash to reflect the received amount. If a loan becomes uncollectible, it is written off as a bad debt expense to maintain accurate financial records.

Primary Journal Entries

Step 1: Issuing the loan

Debit loan receivable, credit cash

Step 2: Recording interest earned

Debit interest receivable, credit interest income

Step 3: Loan repayment

Debit cash, credit loan receivable and interest receivable

Step 4: Writing off a bad loan (if needed)

Debit bad debt expense, credit loan receivable

Knowing how to record a loan in accounting sets the tone for all cashflow management scene that waits ahead.

Is a loan a liability or an asset?

A loan can be an asset or a liability, depending on whether you’re lending or borrowing. But first, take a look at the definitions of each.

What is an asset?

An asset has monetary value and can benefit the owner in the future. Examples include cash, equipment, real estate, and loan receivables.

What is a liability?

A liability is an obligation to pay money or provide services to another party, such as a person, business, employee, or bank. For example, if you’re a CEO and your company hasn't paid your agreed salary for several months, the unpaid amount is considered a liability for the company.

Circling back to whether the loan is an asset or a liability – well, it’s an asset for the lender and a liability for the borrowers. “Loan Receivable,” in itself, is an asset as it represents the money that a lender expects to receive from the borrower. Since the borrower owes this amount, the lender records it as an asset to keep track of future payments.

Difference between loan receivable and payable

Accounting for loans receivable and payable reflects two opposite sides of the same coin. A loan receivable is an asset recorded by a lender. It represents the money owed by a borrower. On the other hand, a loan payable is a liability recorded by a borrower. This represents the money they owe to a lender.

Let’s scan the key differences between the two below:

Aspect	Loan Receivable	Loan Payable
Who Records It?	Lender (e.g., bank or business)	Borrower (e.g., individual or company)
Accounting Category	Asset (because it represents money owed to the lender)	Liability (because it represents money the borrower must repay)
Balance Sheet Placement	Recorded under current or non-current assets, depending on repayment terms.	Recorded under current or non-current liabilities, based on repayment schedule.
Example	A bank loans £10,000 to a business and records it as a loan receivable.	A business borrows £10,000 from a bank and records it as a loan payable.

Now that you know the core differences between the two, you can conduct better account management when you’re handling loan transactions. Every loan or credit deal comes with risks. Missing or delaying payments can hurt your business credit score and make it harder to get funding in the future. Always check the terms and conditions carefully before you commit.

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FAQs - Loan Receivable

Here are some commonly asked questions about loan receivable:

How do accounts receivable loans work?

With accounts receivable financing, a lender gives you a portion of your unpaid invoices upfront, sometimes up to 96% of the total amount. Once your customer pays the invoice, you get the rest of the money, minus the lender's fees.

How much does accounts receivable financing cost?

Besides interest, lenders might charge origination fees, usually between 1% and 5% of the loan amount. You may also have other costs, such as late payment fees.

Is a Loan Receivable a Debit or Credit?

Accounts receivable is recorded as a debit because it represents money that customers owe to the business.

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Key Takeaways

Financial management can make or break a business, triggering its growth or halting it altogether. Keeping an eye on loan receivables requires thorough planning. To keep it intact, a business should outsource the task or have proficient account managers onboard. Remember to check out Wise Business for international payments.

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Receive international payments with Wise Business

Wise can help UK businesses, freelancers and sole traders get paid by customers in multiple currencies, with low fees and the mid-market exchange rate.

Your Wise Business account comes with local account details to get paid in 8+ major foreign currencies like Euros and US Dollars just as easily as you do in Pounds.

All you need to do is pass these account details to your customer, or add them to invoices, and your customer can make a local payment in their preferred currency. You can also use the Wise request payment feature to make it even easier and quicker for customers to pay you.

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Sources used:

1. Business lending is predicted to hit 2.8% in 2025

Sources last checked on date: 13-May-2025