The terms creditor and debtor seem straightforward and are commonly used in the business lexicon. However, the practicalities of these terms can be tricky for one who is new to the business world. If you’re a business owner, investor, or even a learner, you need to have a comprehensive understanding of what is a creditor and what is a debtor, how they are different, and how these terms are used in the business context.
Understanding these terms will help you to know what your business needs to get and what it has to pay. Generally, a business operates with credit, getting access to goods services and finances before making the full payment. Consequently, it gives rise to creditors and debtors in the business. So, understanding the two is essential for everyone. Let’s kick off with what is a creditor?
What is a Creditor?
A person or an entity that is owed money for the goods or services or loan provided to another person/business is known as a creditor. So, if you have provided a loan, goods or services to a person or business which haven’t paid you yet, you’d be called a creditor. Being a business owner, you’d encounter two types of creditors: one that provides you with loans and the trade creditors.
Banks and other financial bodies are one of the most reliable and renowned creditors these days. These are the best resources for businesses to get finance for their ventures. In this way, they are creditors, as the businesses need to repay the money they borrowed. In most cases, the bank will charge interest on the money borrowed.
Trade creditors come in second place. These are the creditors that supply materials to businesses to manufacture or produce goods. For instance, a brick supplier would be owed money from a builder as these bricks are used for building projects. Based on your business type and the work you perform, you’d be classed as creditor or debtor.
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What is a Debtor?
To put it simply, a debtor is the opposite term of the creditor. A debtor is a person, entity, or business that owes money or who needs to pay a debt to someone (creditor). An example of a debtor is a person who has taken out a loan for building a new home. In the world of business, there are commonly two types of debtors: Trade debtors (money owed from customers) and staff loans.
Trade debtors are also called account receivables. They refer to those customers who owe money to the business. Let’s say you have taken the services of a plumber but haven’t paid him. In this case, you’d be called a trade debtor.
In addition, the staff loan is a preferential loan that an employer offers to its employee at a comparatively lower interest rate. Here the employee would be the debtor to the employer.
Debtors and Creditors in Small Business
If you’re are a business owner, you’d find so many customers that don’t pay for the goods or services upfront. Rather they pay you after some time, these customers would be debtors to your business. And your business would be a creditor in this case. Likewise, you are a debtor to your supplier, if you get the goods and services from your supplier and haven’t paid him yet.
These two terms are important for small businesses as they affect the assets and liabilities section of the balance sheet and the cash flow of your business. If you’re a creditor, it means it is your asset and is a positive sign for your business. Contrarily, if you’re a debtor, it is your liability.
Learning the difference between the two and using them effectively help businesses to grow. On the contrary, failing to do so can lead your business towards decline.
Quick Sum Up
So, after learning what is a creditor and what is debtor, you have understood their differences and practicality in the business world. No matter what your business size, industry or nature is, your business transactions revolve around creditors and debtors. In a nutshell, creditor is a person who lends money and a debtor is someone who needs to pay a creditor. A business should keep track of its debtors for getting paid at the right time to pay off its creditors for the smooth flow of the working capital of the business.
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Disclaimer: This blog is written for general information on creditors and debtors.