Looking at this from the other side, a person who owes money is a debtor. A debtor is a term used in accounting to describe the opposite of a creditor – an individual that owes money, or who is in debt to an organisation or person. For example, a debtor is somebody who has taken out a loan at a bank for a new car.
A business might have a very healthy looking income, but there can be problems making financial decisions based on that income if it’s not actually collected. It’s important that a business also looks at debtors as an aged debtor report. Usually, a vendor can be both a debtor and a creditor of the business. Since a vendor may be providing the company with some kind of finished products and also can be buying the same products from another company.
More meanings of debtor
However, customers of companies that provide goods or services can be debtors if they are allowed to make payment at a later date. The FDCPA is a consumer protection law, designed to protect debtors. This act outlines when bill collectors can call debtors, where they can call them, and how often they can call them. It also emphasizes elements related to the debtor’s privacy and other rights.
- If my bank grants me a loan, I am the borrower and the bank is the creditor.
- It’s important for businesses to examine these ratios before accepting another loan.
- A company that wants to borrow money might pledge a piece of machinery, real estate, or cash in the bank as collateral.
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As these entities loan businesses money to finance their ventures – be it expansion, or otherwise – they become creditors. They become creditors as those businesses are required to repay to money borrowed. A borrower is in debt to a lender or financial institution when they borrow money. They usually complete applications and have legal obligations when borrowing money — in other words, if you take out a loan, you have a contractual obligation to pay it back. When that card user (debtor) spends money on that credit card, they are now essentially borrowing money from the credit card company (creditor) to pay for services or goods.
The history of the term “debtor”
With mortgages, the home (in this case Sally’s home) is used as collateral for the loan. At the same time, that business owner is a creditor of the bank’s because they have loaned the owner money that has yet to be repaid. Customers who do not pay for products or services upfront, for example, are debtors to your business, which serves as the creditor in this scenario.
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. 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.
More from Merriam-Webster on debtor
If they choose what’s known as the standard repayment plan, they will be required to make fixed monthly payments for 10 years, at which point their debt will be completely paid off. As with all debt, companies must analyze their debt to equity ratio and quick ratio to properly manage their debt level. Some companies borrow too much money and can’t afford the interest payments over time. It’s important for businesses to examine these ratios before accepting another loan.
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Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. We are an independent, advertising-supported comparison service. For example, consider Sally, looking pro forma wikipedia to take out a mortgage to buy a home. It is common to drop the word ‘trade’ and simply refer to ACME as a debtor. At Accounts and Legal, we pride ourselves on being an accountant who cuts out all the jargon and speaks your language.
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A company that wants to borrow money might pledge a piece of machinery, real estate, or cash in the bank as collateral. A debtor is also known as a borrower when the term used in relation to a loan. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team.