Essential Guide to Accounting for Private Lenders

Introduction

Accurate accounting is the foundation of a well-managed private lending business. This guide, developed by the team at Baseline, will walk you through key accounting principles and best practices—from loan origination to servicing and final payoff. Whether you’re recording interest accrual, recognizing revenue, or reconciling loan payoffs, understanding the right accounting approach ensures financial clarity and compliance.

At the core of private lending accounting is accrual accounting, the standard method defined by International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). This approach records financial transactions when they are earned or incurred, rather than when cash is received or paid, offering a more accurate financial picture.

Revenue Recognition: Revenue is recorded when a service is provided, such as interest earned on a loan, even if cash hasn’t been received yet.

Expense Recognition: Expenses are matched with the revenues they contribute to, ensuring a clearer representation of profitability.

By following accrual accounting principles, private lenders can produce consistent, transparent financial statements, making it easier to assess performance, attract investors, and stay compliant with industry standards.

Chart Of Accounts

A Chart of Accounts (COA) organizes all financial transactions as an asset, liability, income, or expense to ensure accurate tracking and reporting.

A well-defined COA helps private lenders monitor loan balances, interest income, servicing fees, funding sources, and operational expenses. Each account is assigned a unique account number and grouped into standard categories, making it easy to generate financial statements, reconcile transactions, and maintain compliance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

Sample Chart of Accounts for Private Lenders

This illustration is a sample Chart of Accounts for a private lending business. While this example provides a general framework, each lending business may have unique accounting requirements depending on its lending model, regulatory considerations, and operational needs. Adjustments may be necessary to align with specific business structures and reporting preferences.

Assets (1000-1999)

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Account Number	Account Name	Account Type	Detail Type	Purpose
1001	Company Ops	Bank Account	Cash	Primary operating cash account used for business transactions.
1050	Clearing	Bank Account	Cash	Temporary account for funds in transit before final allocation.
1100	Loan Trust	Bank Account	Cash	Account holding funds related to borrower payments or disbursements.
1101	Investor Trust	Bank Account	Cash	Account holding funds related to investor contributions and payouts.
1200	Fees Receivable	Accounts Receivable	Accounts Receivable (A/R)	Outstanding amounts due from borrowers for fees or payments.
1201	Interest Receivable	Accounts Receivable	Accounts Receivable (A/R)	Accrued but unpaid interest owed by borrowers.
1300	Loan Receivable	Other Current Asset	Notes Receivable	Outstanding loan balances due from borrowers.

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Liabilities (2000-2999)

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Account Number	Account Name	Account Type	Detail Type	Purpose
2020	Investor Payable	Other Current Liability	Accounts Payable (A/P)	Tracks investor funds contributed to loans and interest owed to investors.
2030	Prepaid Interest Reserve	Other Current Liability	Accounts Payable (A/P)	Interest collected upfront but not yet earned; recognized over time.
2040	Interest Reserve	Other Current Liability	Accounts Payable (A/P)	Borrower-funded interest reserve to cover future interest payments.
2050	Construction Reserve	Other Current Liability	Accounts Payable (A/P)	Borrower-funded construction reserve held for future draws.
2060	Refund Reserve	Other Current Liability	Accounts Payable (A/P)	Funds held for refunding borrower overpayments or adjustments.

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Income (4000-4999)

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Account Number	Account Name	Account Type	Detail Type	Purpose
4000	Origination Fee Revenue	Income	Loan Origination Income	Revenue earned at loan closing from origination fees.
4010	Wire Fee Revenue	Income	Loan Origination Income	Fees collected for wiring loan proceeds or payments.
4020	Interest Income	Income	Interest Income	Earned interest from borrower payments.
4030	Late Fee Revenue	Income	Loan Servicing Income	Charges for borrower late payments.
4040	Prepayment Penalty Revenue	Income	Loan Servicing Income	Fees charged when a borrower repays the loan early.
4050	Exit Fee Revenue	Income	Loan Servicing Income	Fees collected at loan payoff, often structured as a percentage of the loan balance.
4060	NSF Fee Revenue	Income	Loan Servicing Income	Fees collected for non-sufficient funds (bounced payments).
4070	Other Revenue	Income	Miscellaneous Income	Miscellaneous revenue earned that does not fall under other categories, such as payoff processing fees or administrative charges.

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Expenses (5000-5999)

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</div><table><tbody><tr><th>Account Number</th><th>Account Name</th><th>Account Type</th><th>Detail Type</th><th>Purpose</th></tr><tr><td>5000</td><td>Third-Party Fee Expense</td><td>Cost Of Goods Sold</td><td>Loan Origination & Servicing Costs</td><td>Fees paid to brokers, correspondents, or capital providers for origination or loan extensions.</td></tr><tr><td>5010</td><td>Wire Fee Expense</td><td>Cost Of Goods Sold</td><td>Bank Fees & Service Charges</td><td>Costs related to wiring funds for loan disbursements or borrower payments.</td></tr><tr><td>5020</td><td>Interest Expense (Investor Return)</td><td>Cost Of Goods Sold</td><td>Interest Expense</td><td>Interest paid to investors or capital providers who fund loans.</td></tr><tr><td>5030</td><td>Recording Fee Expense</td><td>Cost of Goods Sold</td><td>Loan Servicing Costs</td><td>Costs related to recording loan documents.</td></tr></tbody></table>

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Loan Funding

There are two ways to record the funding of a loan: Gross Funding and Net Funding. The more common one is Net Funding, where the lender deducts fees and reserves from the loan proceeds.

Gross Funding

When a loan is funded, cash is disbursed to the borrower, creating a loan receivable on your balance sheet. This transaction represents a decrease in cash and an increase in loan receivables.

<span class="callout">Example: You originate a loan and disburse $100,000 to the borrower.</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Loan Receivable	100,000
YYYY-MM-DD	Cash (Clearing)		100,000

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Net Funding

Since lenders often fund the loan net of fees and reserves, the borrower does not receive the full loan amount in cash. Instead, fees and reserves are deducted from the total loan amount before disbursement.

<span class="callout">Example: You originate a $100,000 loan, with a $5,000 origination fee and $20,000 interest reserve deducted. The borrower receives $75,000.</span>

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<table><tbody><tr><th>Date</th><th>Account</th><th>Debit ($)</th><th>Credit ($)</th></tr><tr><td>YYYY-MM-DD</td><td>Loan Receivable</td><td>100,000</td><td></td></tr><tr><td>YYYY-MM-DD</td><td>Accounts Receivable or Origination Fee Revenue</td><td></td><td>5,000</td></tr><tr><td>YYYY-MM-DD</td><td>Interest Reserve</td><td></td><td>20,000</td></tr><td>YYYY-MM-DD</td><td>Cash (Clearing)</td><td></td><td>75,000</td></tr></tbody></table>

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Notes

• Loan fees (e.g., origination fees) are recorded as revenue, often deducted from the loan proceeds.
• Reserves and escrow (e.g., construction or interest reserves) are cash-funded and recorded as liabilities.
• Net funding allows lenders to record a single transaction that reflects the loan balance, cash disbursed, and any deducted amounts.

Reserves and Escrows

When originating a loan, private lenders may collect reserves and escrows at closing, which must be accurately recorded for proper financial reporting. Reserves such as interest reserves, construction reserves, or escrow funds for taxes and insurance are cash-funded at closing and set aside for future use. Since these funds are held for disbursement at a later date, they should be recorded as liabilities until used.

<span class="callout">Example: A borrower funds a $20,000 interest reserve at closing</span>

Journal Entry for Reserves

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Loan Trust)	20,000
YYYY-MM-DD	Interest Reserve		20,000

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Notes

• Reserves and Escrows (e.g., construction or interest reserve) are cash-funded and recorded as liabilities.
• We recommend holding Reserves and Escrows cash balances in a separate bank account.

Prepaid Interest

In lending, it is common practice to collect the first month’s interest at loan funding. Think of this as a small interest reserve. Since interest is charged in arrears and prepaid interest is received upfront, it cannot be immediately recognized as revenue. Instead, it is recorded as a prepaid liability (such as an Interest Reserve or Prepaid Interest).

Once the first payment period has passed, the prepaid interest is amortized—meaning it is gradually recognized as earned Interest Income in the lender’s financial statements.

<span class="callout">Example: A lender collects $3,000 in prepaid interest at loan closing and holds it in Prepaid Interest Reserve</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Loan Trust)	3,000
YYYY-MM-DD	Prepaid Interest Reserve		3,000

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Once the first month has passed, the prepaid interest is earned and recognized as revenue. At this point, the liability in Prepaid Interest Reserve is reduced, and the amount is moved into Interest Income.

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Prepaid Interest Reserve	3,000
YYYY-MM-DD	Interest Revenue		3,000

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Notes

• Prepaid interest is collected at closing but must be recorded as a liability (Prepaid Interest or Interest Reserve).
• Interest is only recognized as income once the time period it covers has passed.
• Amortizing prepaid interest ensures accurate financial reporting, preventing premature revenue recognition.

Construction Draws

In construction and fix-and-flip loans, lenders often provide funds for renovations or development in stages. Instead of disbursing the full loan amount upfront, lenders release funds incrementally as the borrower completes work and requests reimbursements.

However, the way interest accrues on these loans depends on whether the lender uses a Dutch interest structure or a Non-Dutch interest structure.

Dutch Loans accrue interest on the full loan amount, including any undrawn construction funds.

Non-Dutch Loans accrue interest only on disbursed amounts, meaning interest is not charged on undrawn funds. Instead of using a Construction Reserve, each draw request increases the loan balance as a new advance.

Dutch Loans

Under the Dutch structure, the borrower is charged interest on the full loan amount, including any undrawn construction funds. The lender sets aside a Construction Reserve, and as the borrower draws from it, the Construction Reserve liability decreases while cash is disbursed.

<span class="callout"> Example: A borrower has a $500,000 loan, with $100,000 held in a Construction Reserve. The borrower requests a $25,000 draw, reducing their reserve balance to $75,000.</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Construction Reserve	25,000
YYYY-MM-DD	Cash (Loan Trust)		25,000

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Non-Dutch Loans

In Non-Dutch loans, interest only accrues on the disbursed loan amount, meaning the borrower is not charged interest on undrawn funds. Instead of maintaining a Construction Reserve, each construction draw is treated as a new loan advance, increasing the borrower’s outstanding balance.

<span class="callout"> Example: A borrower has a $400,000 loan balance and requests a $25,000 draw for construction. Since there is no pre-set Construction Reserve, the lender advances the additional funds from available capital, increasing the total outstanding loan balance to $425,000.</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Loan Receivable	25,000
YYYY-MM-DD	Cash (Clearing)		25,000

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Notes

• Interest on Dutch loans accrues on the full committed loan amount, including undrawn reserve funds.
• Interest on Non-Dutch loans accrues only on the borrower’s outstanding balance, and each draw increases the loan amount rather than reducing a reserve.
• Each draw request reduces the Construction Reserve balance (Dutch) or increases the loan principal (Non-Dutch).
• In Non-Dutch loans, lenders must ensure they have capital available to fund new advances, as they are not pre-allocated from a Construction Reserve.

Monthly Loan Payments

Private lenders primarily issue interest-only loans, meaning borrowers make monthly payments covering only interest without reducing the principal balance. However, some lenders also offer principal and interest (P&I) loans, where payments apply to both interest and loan principal reduction. Within Baseline, monthly interest payments can be processed directly through the platform. Since lenders know the scheduled interest amount, they can record the receivable upfront, recognize the income, and later reconcile it when cash is received.

Interest Only (I/O) Payments

<span class="callout"> Example: A borrower owes $2,500 in monthly interest, which is due on the 1st of the month.</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Interest Receivable	2,500
YYYY-MM-DD	Interest Revenue		2,500

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Once the borrower’s payment is collected, the receivable is cleared, and cash is recorded.

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Clearing)	2,500
YYYY-MM-DD	Interest Receivable		2,500

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Principal & Interest (P&I) Payments

For loans that include principal repayments, the payment is split between interest income and a reduction in the loan receivable.

<span class="callout"> Example: A borrower makes a $5,000 monthly P&I payment, where $2,500 is interest and $2,500 is principal repayment.</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Interest Receivable	2,500
YYYY-MM-DD	Interest Revenue		2,500

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Once the borrower’s payment is collected, the Interest Receivable is cleared, Loan Receivable decreases, and cash is recorded.

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Clearing)	5,000
YYYY-MM-DD	Interest Receivable		2,500
YYYY-MM-DD	Loan Receivable		2,500

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Notes

• Record Interest Receivable for both I/O and P&I payments before payment is received.
• When a payment consists of both principal and interest, it is important to know the split between interest income and principal reduction.
• A single bulk journal entry may be used to record the total interest receivable if collecting payment across an entire loan portfolio.

Loan Payoffs

A loan payoff occurs when a borrower repays the outstanding balance in full, either on schedule or before maturity. Within Baseline, lenders can generate payoff statements for the borrower or their title company with clear breakdown of principal, interest, and any fees owed at the time of repayment.

At payoff, the loan receivable balance should be reduced to zero, and any final interest payments or fees should be properly accounted for. However, specific scenarios may require additional adjustments:

✅  The borrower overpays interest, requiring a refund.

❌  The borrower underpays interest, requiring additional collection.

<span class="callout">Example: A borrower repays a $250,000 loan before maturity.</span>

The payoff includes:

• $250,000 in principal
• $3,500 in interest due
• $2,000 in charges due
• $300 in overpaid interest (which must be refunded)

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<table><tbody><tr><th>Date</th><th>Account</th><th>Debit ($)</th><th>Credit ($)</th></tr><tr><td>YYYY-MM-DD</td><td>Cash (Clearing)</td><td>255,800</td><td></td></tr><tr><td>YYYY-MM-DD</td><td>Loan Receivable</td><td></td><td>250,000</td></tr><tr><td>YYYY-MM-DD</td><td>Interest Receivable</td><td></td><td>3,500</td></tr><tr><td>YYYY-MM-DD</td><td>Fees Receivable*</td><td></td><td>2,000</td></tr><tr><td>YYYY-MM-DD</td><td>Refund Reserve</td><td></td><td>300</td></tr></tbody></table></div>

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In the above case, the borrower overpaid $300 in interest, which cannot be recognized as income. Instead, the extra funds are placed in Refund Reserve until returned to the borrower. A second journal entry is then created to reflect the refund issued to the borrower.

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<table><tbody><tr><th>Date</th><th>Account</th><th>Debit ($)</th><th>Credit ($)</th></tr><tr><td>YYYY-MM-DD</td><td>Refund Reserve</td><td>300</td><td></td></tr><tr><td>YYYY-MM-DD</td><td>Cash (Loan Trust)</td><td></td><td>300</td></tr></tbody></table></div>

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If the borrower underpays interest, the remaining balance remains in Interest Receivable until collected.

<span class="callout">Example: The borrower underpays $200 in interest, paying only $3,300 instead of $3,500.</span>

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<table><tbody><tr><th>Date</th><th>Account</th><th>Debit ($)</th><th>Credit ($)</th></tr><tr><td>YYYY-MM-DD</td><td>Cash (Clearing)</td><td>253,300</td><td></td></tr><tr><td>YYYY-MM-DD</td><td>Loan Receivable</td><td></td><td>250,000</td></tr><tr><td>YYYY-MM-DD</td><td>Interest Receivable</td><td></td><td>3,300</td></tr></tbody></table></div>

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Notes

• Loan Receivable is reduced to zero at payoff.
• Overpaid interest is first placed in a Refund Reserve account and later refunded to the borrower.
• Underpaid interest remains in Interest Receivable until collected.

Investor Payouts

Private lenders often raise capital from investors, where investors fund loans in exchange for a return on their investment. When a loan is funded, serviced, and ultimately paid off, the lender must properly record:

1️⃣  The initial capital contribution from the investor.

2️⃣  The interest earned by the investor (which is recorded as an interest expense for the lender).

3️⃣  The final payout to the investor when the loan is repaid.

<span class="callout">Example: An investor contributes $200,000 to fund a loan. Each month, the investor is entitled to $2,000 in monthly interest.</span>

At the time of funding, the investor contributes capital to finance the loan. This is recorded as a liability (Investor Payable) since the lender is obligated to return the funds.

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Clearing)	200,000
YYYY-MM-DD	Investor Payable		200,000

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Since the investor earns interest on their investment, the lender must record this as an interest expense (as it reduces the lender’s net earnings).

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Interest Expense	2,000
YYYY-MM-DD	Investor Payable		2,000

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When the loan is repaid, the lender returns the investor's initial contribution of $200,000 plus accrued interest.

<span class="callout">Example: 5 months of interest has accrued ($2,000 per month x 5 months = $10,000).</span>

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Investor Payable	210,000
YYYY-MM-DD	Cash (Investor Trust)		210,000

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Notes

• Investor contributions are recorded as liabilities, since they must be repaid.
• Interest paid to investors is recorded as an expense, reducing the lender's net income.
• At payoff, the total investor payout (principal + interest) is settled, bringing the investor's balance to zero.
• Some lenders distribute investor interest monthly or quarterly, while others accumulate it and pay it once the borrower has repaid the loan.

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Fees

Private lenders collect loan fees—such as origination, underwriting, and wire fees— which must be recorded accurately. Fees are most commonly collected at closing. However, some may be collected before closing and others may be deferred till a later event, such as a payoff. Fees represent income to the lender and may be collected in cash or recorded as Accounts Receivable if due later.

<span class="callout">Example: A lender charges a $5,000 origination fee.</span>

Journal Entry for Loan Fees (Initial Recognition)

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Accounts Receivable or Cash (Company Ops)	5,000
YYYY-MM-DD	Origination Fee Revenue		5,000

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Journal Entry for Loan Fees (A/R Settlement)

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Date	Account	Debit ($)	Credit ($)
YYYY-MM-DD	Cash (Company Ops)	5,000
YYYY-MM-DD	Accounts Receivable		5,000

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Notes

• Loan fees are income and should be recorded as A/R, with a second entry to settle the receivable when payment is received.

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