Is a bank loan an asset or a liability?

Usually, for borrowing companies and sole traders, a bank loan is a liability, not an asset. However, this can get a little confusing when a bank loan is taken out to purchase a specific asset and the asset is used as collateral for the loan. Here’s a breakdown of the asset vs liability debate.

What is a bank loan?

A bank loan is any form of financing extended to a borrower by a bank with an agreement for the borrower to repay the funds over a set period of time, usually with interest. While the term technically refers to loans extended by banks, it can colloquially extend to non-banking institutions like building societies and alternative digital lenders.

What is an asset?

An asset is something you own that has some form of future value, for example, a property, investments, or a piece of equipment. Assets can also be intangible, for example, software you have purchased for your team, a trademark, and your logo could also be classified as assets. Any unpaid money (accounts receivable) owed to your business also counts as an asset.

What is a liability?

A liability is money or services you owe another party, whether that’s a person, business, employee, or financial institution. For example, if you owe a supplier for delivered goods or you owe HMRC corporation tax, these financial obligations would count as a liability. If, as a CEO, you have not taken out your agreed salary from your company and your company owes you several months of pay, this is a liability on your company’s part. Similarly, if you’ve covered business expenses from your personal account and the company hasn’t gotten around to repaying those expenses, that is also a liability for the company.

A loan is a liability: As you can see, if you take out a loan, that is money you owe to the bank, which makes it a liability.

Can bank loans be both?

You provide loans: If you, as a business, provide loans to other businesses or individuals, then you could consider bank loans to be both assets and liabilities. This is because when you take a loan out for your business, that would be considered a liability, but when you extend funding to a customer, you would consider that an asset.

Asset-based loans: If you are paying off a loan to purchase an asset, for example, in the form of a commercial mortgage, the loan itself remains a liability until it’s fully repaid. However, the property (or the percentage of the property you have paid off) could be considered an asset, depending on the terms of your agreement with the lender. This is because as you make payments towards the mortgage, you’re increasing your equity in the property. 

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.