In some cases, you may take on a loan, such as a mortgage, that is used to pay for a large purchase, such as a building. This type of loan may require a down payment, which is required by the lender in order to qualify for financing.
To represent a loan with a down payment, you'll need two separate entries in your forecast:
- An Asset entry, representing the item you're purchasing with the loan
- A Financing entry, representing the financed amount
Entry #1: Asset purchase
In this example, we're representing the purchase of a building, which costs $500,000. We made a $10,000 down payment to qualify for the mortgage. Then we'll use that mortgage to finance the balance due of $490,000.
The first step is to enter the asset purchase into your forecast:
- In the Forecast tab, click Assets. Click the Add Asset button:
- Name the asset. Click Next:
- For the example, it's common to choose One-time amount. Then enter the full amount of the asset purchase and the month the purchase takes place. (Don't take the down payment into account; enter the full price of the asset here.) Click Next:
- Choose Long term, and then set the useful life of the asset:
Note: for more on setting the useful life, see Depreciation and Amortization: Determining the useful life of an asset.
- Click Save & Close to save the entry.
Entry #2: Financing for an asset purchase with a down payment
- Navigate to the Financing page now, by clicking Financing:
- Click Add Loan:
- Enter the name of this loan, and select the month when you received it:
- Now enter the amount of the loan. Note that the loan amount is less than the full value of the asset - in our example, the purchase price of our building is $500,000, but we are only financing $490,000 of that price. The balance of $10,000 was a cash down payment:
- Enter the interest percentage and length of the loan, and click Save & Close.
Do I need a forecast entry for my down payment?
You don't need to make a separate forecast entry for your down payment. Your asset entry represents the cash being spent, and the loan represents cash coming into the company to make that purchase. Since your asset purchase is more than your loan amount, the difference (the down payment amount) will automatically be calculated in your forecast as cash spent.