Learn more about what a debtor is in business.
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The definition of debtor is a borrower who is liable to pay a defined sum to a creditor. Creditors are typically banks or suppliers of goods. A borrower might be either an individual seeking a personal loan to buy a home or a company looking for credit to expand its product line. The modern debtor definition typically requires a debt to be repaid with interest.
In this article, we’ll explain the definition of debtor and provide some examples of debtors in the business world. Read on to find out more.
Creditors are the opposite of debtors. When debtors need money, creditors are often more than happy to lend it. Creditors, like debtors, can be either a person or a company. Family or friends can even be considered creditors if they’ve lent you money. Typical, or “real” creditors are banks or finance companies. These types of creditors typically have a credit or financing agreement in place. Creditors make money by charging interest. Paying interest charges to your creditors is one of debtors’ disadvantages.
To fully understand the definition of debtor, it’s helpful to think through some examples. Consider an entrepreneur taking out a business loan to open her first used car lot. She works with a bank to finance a property and obtain her first shipment of inventory. Her loan is for $500,000. Our entrepreneur now fits our debtor definition.
The entrepreneur now owes the bank $500,000. Her bank is the creditor. In this case, the used car lot and her inventory are collateral for the loan. Meaning, if she fails to make a payment, the bank can take possession of the property. They can sell it to ensure that their investment in the entrepreneur is safe.
If you go to the grocery store and pay in cash for your bananas at the register, you’re not a debtor to the grocery store. However, if you pay using your credit card, you may be in debt to your credit card company or bank. Customers are debtors if they have a loan or owe a business for goods purchased but not paid for. Customers of companies that provide goods or services meet the definition of debtor if they’re allowed to make payments at a later date.
For a creditor, money owed to them is considered an asset, depending on what accounting methods they use. If you’re a creditor with questions about how to account for debts outstanding, speak with your trusted accounting professional.
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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.