Creditors are people or businesses that allow others to borrow money to be repaid in the future. A business that provides goods or services to a company or individual and does not expect immediate payment also meets the creditor definition.
In this article, we’ll run through some of the basics of what it means to be a creditor. We’ll also cover why someone would want to be a creditor and how creditors get paid.
Creditors make money by charging interest on the money they loan out to other people or institutions. For example, a creditor could lend a borrower $10,000 with a five percent interest rate. Depending on the term of the loan, the creditor could make quite a bit of money by charging the borrower (or debtor) that interest.
In exchange for this passive profit, a creditor accepts a degree of risk that the borrower may not repay the credit line. When extending credit, most institutions take into account your credit history, credit score, and the size of your down payment or collateral. If you’re borrowing from a friend or family member, considerations might be a bit different.
The definition of creditor is not a one-size-fits-all. There are many types of creditors, including:
As you can see, these are all creditors. However, the creditor definition is much broader than simply referring to one type of lender.
As we mentioned, one way creditors make money is by charging interest. Another way creditors make money is by charging fees. Creditors can charge fees for virtually anything they like, as long as borrowers accept them. This is one advantage of being a creditor. Most often, borrowers are charged late fees for missed payments. However, be sure to check your loan and credit card statements so you don’t miss any out-of-control fees.
Creditors take a risk when extending credit. If a borrower defaults or a debt can’t be repaid, the creditor may have to hire a collection agency or file a costly lawsuit. Often, these strategies are more expensive than the original debt.
If a creditor is not repaid, creditors like banks can repossess homes or cars if a loan is secured. Banks can also take creditors to court over unsecured debts. Personal creditors, like friends and family, have options to claim debts on their taxes, but only after significant efforts to recover the debt. If you are a personal creditor in this situation, speak to your tax professional for advice.
A creditor extends credit, whether in the form of money, goods, or services. Some creditors can repossess collateral like homes and cars on secured loans and can take debtors to court over unsecured loans.
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Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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