Although these two terms might seem straightforward, understanding the role that debtors and creditors play in your business is vital. Depending on the specifics of your business, you may find that you are both a creditor and a debtor. Find out more with our comprehensive guide to the difference between debtors and creditors. Let’s kick off with our creditor definition.
What is a creditor?
Creditors are individuals, people, or other entities (i.e., organisation, government body, etc.) that are owed money because they have provided goods or services or loaned money to another entity. Generally speaking, you can expect to deal with two types of creditors: loan creditors and trade creditors. Loan creditors include banks, building societies, and other financial institutions, whereas trade creditors are essentially suppliers that haven’t yet been paid for the goods/services they supplied.
How to manage your business’s creditors
As a debtor, it’s essential to maintain good relations with your creditors. Poor accounts payable practices can lead to reputational damage, causing vendors and suppliers to avoid working with you. Furthermore, there’s the potential issue of late payment interest, which can hurt your company’s bottom line. Ensure you’re maintaining a robust accounts payable process, negotiate longer credit terms (where possible), and build strong working relationships with suppliers.
What is a debtor?
Debtors are the opposite of creditors. Essentially, it’s a term that refers to individuals, people, or entities that owe money to another entity because they were supplied with goods/services or borrowed money from an institution. Generally, debtors owe a lump sum (the debt), which is split up into monthly repayments over a predetermined period until the debt is finally paid off. Furthermore, debtors may need to pay interest on the original value of the loan.
How to manage your business’s debtors
To ensure that your business doesn’t encounter cash flow issues as a result of the non-payment of debts, it’s imperative to manage your debtors effectively. If a debtor falls behind on their repayments, the debt may turn into a bad debt (i.e., an irrecoverable receivable), which means that the company you extended credit to can’t complete the payment and you’ll need to write it off.
There are many different ways that you can manage your company’s debtors. Firstly, you should improve your accounts receivable process so that you’re able to recover your outstanding payments as quickly as possible. Think about offering positive incentives for early payment and streamlining the invoice workflow. Also, an airtight credit policy can help ensure that you’re only extending credit to businesses that can make your repayment schedule.
Understanding the difference between debtors and creditors
Now that you’ve taken a look at our creditor and debtor definitions, you’ll see that the differences between these entities are relatively stark. Creditors are individuals/businesses that have lent funds to another company and are therefore owed money. By contrast, debtors are individuals/companies that have borrowed funds from a business and therefore owe money.
However, it’s also important to remember that virtually all businesses are creditors and debtors, as companies often extend credit and pay suppliers via delayed payment terms. In fact, the only companies that are unlikely to be debtors and creditors are businesses that make all of their transactions in cash. For medium and large enterprises, paying all transactions in cash is unheard of.
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