The difference between a debtor and a creditor
/What is a Debtor?
A debtor is an individual or entity that owes money to a creditor. The concept can apply to individual transactions, so that someone could be a debtor in regard to a specific supplier invoice, while being a creditor in relation to its own billings to customers. Even a very wealthy person or company is a debtor in some respects, since there are always unpaid invoices payable to suppliers. The only entity that is not a debtor is one that pays up-front in cash for all transactions. Thus, an entity could be a debtor in relation to specific payables, while being flush with cash in all other respects.
What is a Creditor?
A creditor is an individual or entity that is owed money. Typically, the creditors of a business are its suppliers, which have provided it with goods and services, and in exchange expect to be paid by an agreed-upon date. Or, the business owes money to a lender, which also expects to be repaid at a later date. The amounts owed should be reported on the firm’s balance sheet as either accounts payable or loans payable. Accounts payable are usually classified as current liabilities, while loans may be classified as either current or long-term liabilities, depending on their scheduled repayment dates.
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The Distinction Between a Debtor and a Creditor
The key differences between a debtor and creditor are as follows:
Lending money. The creditor frequently demands collateral and/or a personal guarantee, as well as loan covenants, from the debtor. This is because the amount of loaned funds can be quite large, so the creditor is at considerable risk of loss over a potentially lengthy period of time. An entity that lends money is likely to be in business solely for this purpose.
Extending credit. The creditor is extending a relatively small amount of credit to a debtor for a short period of time, and so is more concerned with the size of the credit line granted and payment terms than the need for collateral or personal guarantees. Covenants are unheard of when granting trade credit. An entity that extends credit is in the business of selling goods or services, and only engages in the extension of credit as an ancillary function. It may be necessary to extend credit simply to be competitive in the marketplace.
This can be in the form of loans payable or trade accounts payable.
Nearly every business is both a creditor and a debtor, since businesses extend credit to their customers, and pay their suppliers on delayed payment terms. The only situation in which a business or person is not a creditor or debtor is when all transactions are paid in cash.
Examples of a Debtor and Creditor
If Alpha Company lends money to Charlie Company, Alpha takes on the role of the creditor, and Charlie is the debtor. Similarly, if Charlie Company sells goods to Alpha Company on credit, Charlie is the creditor and Alpha is the debtor.