Square Loan payment breakdown

[Littleblue1]

I use Wave Accounting, and import my own information.  

Can anyone tell me how they record the Square loan repayment from your dailies as far as principal and interest/loan fee. 

Since the repayment is a flat rate percentage of the dailies and does not show what portion is the loan fee Im not sure how to break this down and record.

Thank you.

[TheRealChipA · Accepted solution]

Hi there @Littleblue1.  So, first I need to clear up something.  When you take out the loan, Square adds the flat loan fee to the total amount that you owe.  Then, they apply the daily repayment amount to that total which includes the loan fee.  They do not tell you how much of each repayment amount is principle vs. loan fee for two reasons.  First, it is NOT interest which can change over the life of the loan.  Second, since this repayment amount is calculated at the transaction level first, it would be too burdensome to track those numbers since they don’t make sense for MCAs.  

What I do when I take out a Square Loan is:

1. I set up the loan balance sheet account and add two transactions to it — one for the amount of the loan and another for the loan fee.
2. Each day, I post the daily repayment amount against that total loan amount.

Yes, this does make it look like I paid the full loan fee (in my P&L) on the date I took out the loan.  But, actually, this is the truth of the matter since it isn’t interest, but a flat fee.  But it has the advantage of not having to get into the nuts and bolts of prorating that loan fee which from an accounting point of view doesn’t serve any practical or legal purpose.

Lastly, I’d recommend talking to your accountant about this.  If they (for some odd reason) want you to prorate the loan fee on a daily or weekly or monthly basis, they would be the ones to have to tell you how to calculate and book that.  But I’d be very surprised if they cared one way or the other, since the IRS certainly doesn’t.

Let me know if you have any other questions.

[TheRealChipA · Accepted solution]

You’re welcome.  I will reiterate that I would recommend speaking with your accountant.  I don’t know the laws and regulations in your state and so I can’t say for certain that there might not be issues with this where you live and have your business.  It’s always best to be safe now rather than sorry later.  But what I do I believe most users of MCA loans do.

[TheRealChipA · Accepted solution]

Hi there @Littleblue1.  So, first I need to clear up something.  When you take out the loan, Square adds the flat loan fee to the total amount that you owe.  Then, they apply the daily repayment amount to that total which includes the loan fee.  They do not tell you how much of each repayment amount is principle vs. loan fee for two reasons.  First, it is NOT interest which can change over the life of the loan.  Second, since this repayment amount is calculated at the transaction level first, it would be too burdensome to track those numbers since they don’t make sense for MCAs.  

What I do when I take out a Square Loan is:

1. I set up the loan balance sheet account and add two transactions to it — one for the amount of the loan and another for the loan fee.
2. Each day, I post the daily repayment amount against that total loan amount.

Yes, this does make it look like I paid the full loan fee (in my P&L) on the date I took out the loan.  But, actually, this is the truth of the matter since it isn’t interest, but a flat fee.  But it has the advantage of not having to get into the nuts and bolts of prorating that loan fee which from an accounting point of view doesn’t serve any practical or legal purpose.

Lastly, I’d recommend talking to your accountant about this.  If they (for some odd reason) want you to prorate the loan fee on a daily or weekly or monthly basis, they would be the ones to have to tell you how to calculate and book that.  But I’d be very surprised if they cared one way or the other, since the IRS certainly doesn’t.

Let me know if you have any other questions.

[Littleblue1]

Great idea.  Thank you.  I know they do not break down the principal vs fee on the daily repayment, seems tricky to record that way.  I will use your method.  Thanks again

[TheRealChipA · Accepted solution]

You’re welcome.  I will reiterate that I would recommend speaking with your accountant.  I don’t know the laws and regulations in your state and so I can’t say for certain that there might not be issues with this where you live and have your business.  It’s always best to be safe now rather than sorry later.  But what I do I believe most users of MCA loans do.

[Abby_M · Accepted solution]

Hi @Littleblue1 

Thanks for posting on the Seller Community.

Square loans have no ongoing interest charges. The total cost of the loan is simply the loan fee, which is the difference between the total owed amount and the initial loan amount you apply for. The total cost of the loan never changes.

Please contact us directly, our Square Loans line is open between 8am-5pm PT Monday-Friday if you want to give us a call.

[Littleblue1]

Thank you, I understand that there is only the loan fee.  My question was regarding accounting and how to divide the principal and loan fee portion of the amount deducted from the daily sales when it is not indicated. 

[Abby_M]

Hi, @Littleblue1 

The Square loan fee and the the offer amount are not divided. 

Please contact us directly, our Square Loans line is open between 8am-5pm PT Monday-Friday if you want to give us a call.

[SomaCoffeeHouse]

<I HAVE ADJUSTED THE SOLUTION AS BELOW>

The solution offered of expensing the loan fee up front has a problem is a partial answer.  The full loan is being paid against the total (loan + fee).   Let's use an example of a $10,000 loan + $1200 fee.  The solution suggested is to simply expense the $1200 fee, but not to recognize the 1200 as well as the 10000 as liabilities.   The solution to me is as follows:

The original transaction would be:

  cash       $10000

      loan         $10000

next recognize fee

    finance expense     $1200

       loan fee / payable       $1200

Next, amortize each payment by the proportion that the loan fee was of the total...10.7% (1200/11200) because each payment is paying both.   Unfortunately, Square does not give an internal interest rate to amortize payments.  I would do this approximated amortization at the end of month rather than on each deposit.  Let's say $500 was paid in the month.  The transaction would look like...

   Loan fee payable           $53.50  ($500*10.7%)

   loan                              $446.50

       Square credit card sales        $500 because only the net deposit is reflected on the books as sales

This has been my approach. I think that it best approaches GAAP for accrual and cash basis books.  Would appreciate any comments.

[TheRealChipA]

@SomaCoffeeHouse You misread my solution. I did NOT say only to expense the loan fee. I said to include it in the total about owed. This does, indeed, show the loan fee as an expense on the date the loan was taken out, as well as including that person in liabilities. 

I agree that my “solution” is not completely GAAP compliant. But my accountant says it’s no big deal for short-term loans. He just assumes that I’m paying all of the fee first then paying off the principle. 

Your accountant might be different. If so, let them tell you how they want you to book this. I like your solution but my accountant and I consider it overkill. I don’t want to go through all of that for something that’s always payed off in 6-12 months.