Creditor vs. debtor - what's the difference?
A debtor is someone who owes money, while a creditor is someone who is owed money. We explain how both work, from personal loans to business finances.
Key takeaways
Debtors owe money, whether they've borrowed it or need to pay for goods or services
Creditors are owed money and can include banks, businesses, individuals and other organisations
Businesses can be both debtors and creditors, depending on who they owe money to and who owes them
What is the difference between a debtor and a creditor?
The main difference is that a debtor owes money, while a creditor is owed money - for example, if you take out a personal loan, you're the debtor and the lender is the creditor. The same principle applies when a business supplies goods to a customer who hasn't yet paid.
Debtor | Creditor |
|---|---|
Owes money to another party | Is owed money by another party |
Usually needs to make repayments or settle an outstanding bill | Has the right to receive payment |
Examples include borrowers and customers with unpaid invoices | Examples include lenders and suppliers awaiting payment |
What is a debtor?
A debtor is a person or business that owes money to another person or organisation. You become a debtor when you borrow money or receive goods or services that you agree to pay for later - for example:
Mortgage borrowers: You owe money to the lender that helped you buy your home
Credit card holders: You owe your card provider money when you spend using credit
Businesses: You owe money to suppliers who've provided goods or services on credit
Debtors must repay what they owe according to the terms of their agreement, which can include interest or fees on top of the initial sum.
What is a creditor?
A creditor is a person, business or organisation that is owed money by another party. Creditors aren't always banks or lenders - they can also include suppliers waiting for customers to pay their invoices. Examples include:
Banks, lenders and credit card providers: They provide loans, mortgages and other forms of credit
Businesses and suppliers: They provide goods or services before receiving payment
Individuals: You become a creditor if you lend money to a friend who agrees to repay you
How does someone become a debtor or creditor?
You become a debtor when you owe money to someone else, and a creditor when someone else owes you money.
How to become a debtor
You might become a debtor when you:
Take out a mortgage: You borrow money to buy a property and repay the lender over an agreed period
Use a credit card: You borrow from the card provider when making purchases and must repay what you've spent
Buy something on credit: You receive goods or services now and agree to pay for them later
How to become a creditor
You might become a creditor when you:
Lend money: You provide someone with money they agree to repay
Extend credit as a business: You supply goods or services and let customers pay later
Acquire an existing debt: You purchase or receive the rights to money owed under an existing debt agreement
A person or business can be both a debtor and a creditor at the same time, depending on their financial arrangements and circumstances.
What are trade debtors and trade creditors in a business?
Trade debtors are customers who owe your business money for goods or services, while trade creditors are suppliers your business owes money to. For example, if you run a business and invoice a customer £1,000 for completed work, that customer becomes your trade debtor until they pay, while if you purchase £500 of supplies and agree to pay next month, your supplier is your trade creditor.
These amounts also have accounting names:
Trade debtors (accounts receivable): Money that customers owe your business
Trade creditors (accounts payable): Money that your business owes suppliers
Both appear in your business accounts and help you understand your financial position.
How do debtors and creditors affect my business?
Debtors and creditors affect how much money your business has available, what it owns and what it owes.
Balance sheets
Trade debtors are usually recorded as current assets because their outstanding payments are money your business expects to receive. Trade creditors are generally recorded as current liabilities because they're amounts your business needs to pay, usually within 12 months.
Cash flow
Having lots of unpaid customer invoices can cause cash flow problems, even when your business is making a profit. Meanwhile, paying suppliers later can help you hold on to cash temporarily, although you'll still need enough money to settle those bills when they're due.
📣 Did you know? Research by the Department for Business and Trade estimates that 28%[1] of UK businesses are affected by late payments each year. Their findings also indicate that at any given time, around £26 billion[1] is owed to UK businesses through estimated late payments.
You could consider invoice finance to access funds tied up in unpaid invoices, although fees and eligibility requirements apply.
What happens if my business has too many debtors or creditors?
Having many debtors or creditors isn't necessarily a problem - what matters is how much is owed and when payments are due.
Too many overdue debtors: Late customer payments can leave your business struggling to cover everyday costs
Overdue creditor payments: Unpaid supplier bills can put pressure on your cash flow and damage business relationships
Poor payment planning: If outgoing payments are due before incoming money arrives, your business could run short of cash
Keeping track of payment dates can help you spot potential problems early.
How can a business manage its debtors and creditors?
Managing debtors and creditors means keeping track of what customers owe you and what your business owes others.
Managing debtors
To help customers pay on time, you can:
Set clear payment terms: Agree when payment is due before supplying goods or services
Invoice promptly: Send accurate invoices as soon as work is completed
Check outstanding payments: Monitor overdue invoices and send polite reminders
Check customer creditworthiness: Consider credit checks before offering significant credit terms
Managing creditors
To keep on top of what your business owes, you can:
Track payment deadlines: Record supplier invoices and their due dates
Plan your cash flow: Make sure enough money is available for upcoming bills
Negotiate payment terms: Discuss suitable payment arrangements with suppliers
Communicate early: Contact creditors if you think you'll struggle to pay on time
What are the advantages and disadvantages of being a creditor?
Being a creditor can have financial or commercial benefits, depending on the specific nature of your arrangement, but there's also a risk of late payment or not receiving what you're owed.
Advantages | Disadvantages |
|---|---|
Potential income: You may earn interest when lending money | Late payments: Delays can affect your finances or cash flow |
More sales: Offering credit can encourage customers to buy goods or services | Non-payment: There's a risk you won't recover everything you're owed |
Customer relationships: Flexible payment terms may encourage repeat business | Recovery costs: Chasing unpaid debts can take time and money |
These advantages apply to different kinds of creditors, rather than everyone who is owed money.
What are the advantages and disadvantages of being a debtor?
Being a debtor can give you access to money, goods or services before you've paid for them in full. However, you'll still need to meet your repayment obligations.
Advantages | Disadvantages |
|---|---|
Access to funds: Borrowing can help you afford larger purchases, such as a home or car | Interest and fees: Borrowing may cost more than paying upfront |
Flexible payments: Credit can allow you to spread costs over time | Repayment commitments: Regular payments can put pressure on your budget |
Building credit history: Managing reported borrowing responsibly can help demonstrate your repayment history | Missed payments: Falling behind on reported credit repayments can damage your credit history |
What are the legal implications of being a creditor or debtor?
Creditors and debtors have legal rights and responsibilities, although the rules depend on the type of debt and whether it's regulated.
Creditors
If you're a creditor, depending on the nature of your agreement, you might have the right to:
Recover unpaid debts: You may be able to take legal action to recover money owed, depending on the circumstances.
Charge interest: Apply interest or late-payment charges where permitted by law or your agreement
Participate in insolvency proceedings: Make a claim for money owed if a debtor becomes insolvent
Businesses may also have statutory rights to interest and recovery costs on qualifying late commercial payments. Not all creditors will have all of the same rights or FCA obligations, as it will depend on the specific wording of your agreement.
Debtors
If you're a debtor, your responsibilities and protections may include:
Repaying what you owe: Following the terms of your loan, credit agreement or invoice
Protection from unfair treatment: Firms collecting debts covered by FCA consumer credit rules must treat customers fairly and adhere to the appropriate debt collection requirements
Credit history: Missed payments on reported credit accounts can affect your credit report
Legal consequences: Unpaid debts may lead to court action and, in some cases, enforcement or insolvency proceedings
If you're struggling with repayments, you may be able to arrange a repayment plan or explore options such as a debt management plan.
Other helpful guides
Want to learn more about managing your credit? Take a look at our guides:
Check your credit score for free with MoneySuperMarketÂ
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It can help you stay on top of your score and work out how you can boost it as high as possible.
Author
Mehdi Punjwani
Insurance specialist
Mehdi is a financial writer and editor with over six years of experience in personal finance. He has written for organisations and publications including Equifax, The AA, and USAToday, covering a...
Reviewer
Victoria Russell
General Manager - Commercial
Vikki has worked across financial services for over 20 years, and for the last 15 years, created and nurtured a career within MoneySuperMarket Group, leading to her current role as General Manager...
