Wondering what is a creditor, and what is a debtor? You may have come across these terms a lot of times, but understanding them is not as simple as it seems. More importantly, the role of a debtor or a creditor in a business is of vital importance. If you operate a business (no matter small or large), you may be both at the same time. For this reason, you need to know them right before you start your business.
These terms indicate how the financial system of a business operates. In addition, these show the size and speed of money that comes in and goes out of a business. Read on to explore what is a creditor and debtor and how they are different. Let’s kick off with the creditor!
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What is a Creditor?
A creditor can be a person, business or an organisation that is owed money because they have provided loans, goods or services to another person or entity without receiving any cash payment. Sometimes, a creditor can charge interest on the goods or money borrowed to earn money. Typically, there are two types of creditors:
- Loan Creditors: Banks, building societies and financial bodies are called loan creditors
- Trade Creditors: Creditors who supplied material for the production of goods, e.g. supplier
An example of loan creditors can be banks and financial institutions. They are considered the most prominent creditors nowadays who offer loans to a wide range of projects. On the other hand, trade creditors can be a brick supplier who has supplied bricks for a project to a building contractor but hasn’t received the money.
What is a Debtor?
The term debtor is the opposite of a creditor. An individual, organisation, or entity that owes money, services, goods, or who is in debt to another entity (person, organisation) because they borrowed money from a party (the creditor). In a personal situation, you are a debtor if you have taken money from a friend and haven’t paid him yet.
Generally, debtors are divided into two types:
- Loans: Whenever there is a loan (money) taken by a party, it becomes a debtor to the one who lends the loan.
- Trade Debtors: A person who hasn’t paid you for the goods and services. They’ll be the debtor until the invoice is paid.
Difference Between Debtors and Creditors
Now that you know the definitions of creditor and debtor, the differences between them are straightforward. A creditor is a person or entity that has lent money to other parties and is owed money. On the flip side, a debtor is a person or entity who has borrowed money from a party and thus owes money.
Bear in mind that all business falls under both categories of creditor and debtor except the one who only performs cash transactions. Most often, there are quite a few businesses that perform all their transactions in cash.
Quick Sum Up
So, there you have a guide on what is a creditor and what is a debtor. In short, creditors are owed money, whereas debtors owe money to other entities. To manage the cash flow of your business, we recommend you employ a system that manages your debtors and creditors, establish clear payment terms with them and issue invoices accurately to get the money back from your debtors on time. By doing this, you’d be able to boost the performance of your business.
Disclaimer: This blog is just for the general understanding of what is a creditor and what is a debtor.