1 Aug 2021
A creditor is an individual or business that lends money to another individual or business through providing products or services to them. As soon as they provide the service or product or simply give the loan they become a creditor as they’re owed the money back.
To help reduce the risk of not getting their money back, creditors usually put interest rates on the loan, meaning the debtor or business that borrowed money will pay more back. SMEs and smaller businesses are typically short-term creditors as they’ll set payment terms between 10- 90 days ensuring they’ll get their money back over a shorter period of time.
Creditors can be banks, businesses or even individuals who are providing services or selling products. Businesses that become creditors through providing a trade, service or product are called trade creditors. The other form of a creditor is a bank or entity that typically offers a cash loan.
Businesses who become creditors have debtor days they’ve calculated which forecasts the number of days they’re out of pocket before the debtor pays them back. A creditor can dictate their repayment terms including adding interest on top of the amount owed back and even late payment charges if they don’t get their money back within their payment term.
When a bank is a creditor, they’ll have interest rates on top of the loan which will be added to the regular repayments until they get their money back.
Whether the creditor is a bank or a business, they’ll set their own payment terms for the debtors borrowing which will outline how long they have to settle the debt and any added charges such as interest rates or early repayment discounts they may offer.
If for whatever reason creditors aren’t paid back, there are a few different ways they can approach getting their money back which will be down to the individual business.
When a business is a creditor and they don’t get their money back they have a few options available to them such as arranging repayments with the debtor or claiming against their own tax return for the loss until they’re paid back. In the more extreme situations, businesses can take legal action against debtors who haven’t paid back anything and don’t try to repay what they owe.
When a bank acts as a creditor they will nearly always charge interest on any amount they lend and if debtors can’t repay them, they will repossess any property or assets to make up for their losses. Debtors who borrow from banks usually have to have some form of security in place that will act as repayment if they don’t pay up.
Businesses, particularly SMEs, rely on making accurate calculations when it comes to working out debtor and creditor days as they need to understand their cash flow. It’s therefore important for creditors to understand their own finances before lending them money or providing the services to a debtor.
If you’re currently tied up with a short-term loan or have cash flow issues and want to understand your options, our team can help. Get in touch with us today to understand your Funding Options.
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