Loans Receivable: Understanding and Analyzing Your Balance Sheet

Learning how to read a balance sheet is cruicial for all investors.

A company's balance sheet displays the sum of all funds that have been lent out but have not yet been collected. This sum is referred to as loans receivable. If the company is in the business of lending money, loans receivable likely will be a significant figure. For companies that sell products or services, loans receivable should not be excessively elevated.

Credit Sales

Unless the business is a bank or credit union, loans receivable is the result of credit sales to customers. A food wholesaler may give grocery stores up to 60 days to pay for the groceries they purchase, for example. In such a case, an amount roughly equivalent to 60 days of sales will show up as loans receivable on the balance sheet. Providing excessively generous payment terms will elevate loans receivable to often dangerous levels. This might result in a business having to borrow from banks, and taking on the associated interest expense, to make up for the cash shortfall.