What is a Debtor? | Debtor and Creditors Explained

Debtors and creditors are central to how every business’ financial system operates.

What Is a Debtor?

In its simplest terms, a debtor is a party that owes money to another party.

On a personal level, it can describe a person who’s borrowed money from a friend and hasn’t paid it back yet.

There are two main types of debtor for all business owners to be aware of:

• Loans

A company who takes out a bank loan will become a debtor to that bank. For example, if a digital agency agrees to borrow £10,000 to assist with setting up a new office, they’ll receive that money as a lump sum. Until it’s paid back, over a pre-agreed period of time and with interest, they’ll remain a debtor to the bank.

• Trade debtors

A trade debtor is a customer or client who hasn’t yet paid you for your goods and services. They will remain a debtor until the invoice is paid.

What Is a Creditor?

In its simplest terms, a creditor is a party that is owed money by another party.

On a personal level, it can describe a person who’s leant money to a friend and hasn’t had it paid it back yet.

There are two types of creditor that, as a business owner, you’re likely to be dealing with:

• Loans

Banks and other financial institutions are the most active creditors in any economy. By lending money to businesses, they support start-up and expansion plans with lump sums that are paid back over time, with interest.

• Trade creditors

A trade creditor is an entity that has supplied a service or product and hasn’t yet been paid for it. For example, if a client hasn’t paid the final instalment of a payment plan for a new website project, the agency is a creditor to the client. This scenario means that your business would be a creditor to a debtor.

Conclusion

At their most basic level, business transactions include two parties: the creditor and the debtor. In simple terms, a creditor is someone who lends money, whereas a debtor owes money to a creditor. A corporation can ensure a smooth flow of working capital by keeping track of the time lag between receipt of payment from debtors and payment of money to creditors.

At Accotax, we pride ourselves on being a London chartered accountant that cuts out all the jargon and speaks your language. This ensures that you understand the mechanics of your finances, thus enabling efficiency and stability while you grow your business.

If you need advice or services on any aspects of accounting, tax, business management or specific problems with debtors or creditors, our specialist team are ready to help. Please get in touch with us, or try our instant accounting quote tool and get a competitive fee in just 5 clicks.