What do you do when a loan has no paperwork?
An undocumented loan gets reconstructed from the money itself. The bank statements establish what was borrowed and every payment since; the pattern of those payments reveals the terms; and from there an amortization schedule is rebuilt so each payment splits properly between principal and interest. The result is a real liability on the balance sheet with a balance you can defend — instead of a mystery payment quietly miscategorized as an expense.
This happens more than anyone admits: money borrowed from a partner, a private lender, a card issuer's loan program, or a seller — deal done on a handshake and a wire, papers never drawn or long lost. The payments keep flowing either way, and the books have to say something about them. Here's what they should say.
Step one: find what the money left behind
Even with no documents, the loan left a trail. The funding deposit fixes the amount and the date. The payment history — amount, frequency, any changes — is on the statements. Lender-side records often exist even when yours don't: a payoff quote, an online balance, a year-end interest letter, a 1098. Any one of those anchors the reconstruction.
Step two: derive the terms
A steady payment against a known starting balance implies a rate and a term — that's just arithmetic run backward. A payoff figure or year-end balance from the lender turns "implies" into "confirms": if the derived schedule lands on the lender's number, the reconstruction is right. When we rebuilt one client's undocumented five-figure loan this way, the schedule tied to the lender's statement balance to the penny — that's the standard the work should meet, not "close enough."
Step three: fix the books it was distorting
Every payment previously booked as a plain expense overstated costs by the principal portion. The correction puts the liability on the balance sheet, splits historical payments principal-versus-interest, and restates the affected periods honestly. If prior tax years deducted principal as expense, that's a finding for your CPA — surfaced, not buried.
Step four: paper it going forward
Bookkeeping can reconstruct the numbers; it can't create the legal agreement. A short written note — parties, amount, rate, term — signed after the fact protects both sides, and matters more when the lender is a partner, a family member, or one of your own entities (the multi-entity commingling rules apply in full). Seller-financed deals with thin paperwork deserve the same treatment, then the standard setup in seller-financed notes.
FAQ
Can books really be accurate with no loan documents at all?
Yes — accurate to the bank's own records, which is the standard that matters. The statements define what was borrowed and paid; the reconstruction is verified against any lender-side number available. What documents add is legal protection, not arithmetic.
What if I don't know the interest rate?
It's derivable. A known starting balance and a consistent payment imply the rate; a lender balance at any later date confirms it. If nothing confirms it, your CPA helps pick a defensible assumption — documented in the file, applied consistently.
The "loan" was from me to my own LLC. Does it still need this?
Especially then. Owner money into an entity is either a loan or a capital contribution, and the difference changes taxes and what happens when money comes back out. Undocumented owner loans are the single most common thing we find buried in cleanup work.
Will fixing this change my past tax returns?
It can, if principal was deducted as expense in filed years. The books get corrected regardless; whether amending is worth it is your CPA's call, made with a clean schedule in hand instead of a guess.
Got a payment going out every month that your books can't explain? Book a discovery call — reconstructing it is routine work for us.