A creditor is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed.[1] The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.
Creditors can be broadly divided into two categories: secured and unsecured. A secured creditor has a security or charge, which is some or all of the company’s assets, to secure the debt owed to him. This could be, for example, a mortgage, where the property represents the security. An unsecured creditor does not have a charge over the company’s assets.[2]
The term creditor is frequently used in the financial world, especially in reference to short-term loans, long-term bonds, and mortgage loans. In law, a person who has a money judgment entered in their favor by a court is called a judgment creditor.
The term creditor derives from the notion of credit. Also, in modern America, credit refers to a rating which indicates the likelihood a borrower will pay back his or her loan. In earlier times, credit also referred to reputation or trustworthiness.
Accounting classification
In accounting presentation, creditors are to be broken down into 'amounts falling due within one year' or 'amounts falling due after more than one year'...
The financial statements presentation is this:
- Long-term liabilities
- 'Long-term creditors'
- Current liabilities
- 'Current creditors'
Creditor's power during insolvency
In the UK, once an IVA has been applied for, and is in place through the courts, creditors are prevented from making direct contact under the terms of the IVA. All ongoing correspondence of an IVA must first go through the Insolvency Practitioner. The Insolvency Practitioner will contact you. The creditors will begin to deal with the Insolvency Practitioner and readily accept annual reports when submitted.
Pros and Cons
Products and services may often be prohibitively expensive to pay for up front, or in one lump sum. Financing allows an individual or business to have use of the asset while paying for it in more manageable installments – often weekly, monthly, or sometimes quarterly. The benefit for the debtor is that they get access to funds or equipment that would otherwise be beyond them. This allows them to continue to build their business, so in some sense, the loan could be considered an investment in a business’s own ability to grow. The drawback is that a debt is considered a business liability, and non-payment may result in further penalties and potentially even legal action. The benefit for the creditor is that to be able to make a loan is the sign of a healthy and thriving business. There is also profit to be made in the form of interest paid on every loan repayment – so the ultimate amount paid back will be more than what was borrowed. The drawback is there is potential for non-payment, forcing the creditor to pursue potentially expensive legal proceedings to get what they’re owed.[3]
See also
- Accounts payable
- Accruals and deferred income
- Bank loan and Overdrafts
- Bill of exchange payable
- Creditor's rights
- Debenture loans
- Individual voluntary arrangement
- Intra-group accounts owed
- IOU (I Owe You)
- Payments received on account
- Proposed dividends
- Trade creditors
References
- ^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 264. ISBN 0-13-063085-3.
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: CS1 maint: location (link) - ^ "Insolvency for creditors". Australian Securities and Investments Commission. Australian Securities and Investments Commission. March 23, 2016.
- ^ "Creditors and Debtors Explained". Clear House Accountants. 2019-01-15. Retrieved 2019-03-07.