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Debtors play a crucial role in the life of a small business owner—both at the beginning and throughout the life of a company. Find out in this article all about debtors: what they do, why it’s important, the differences between a debtor and creditor, and more. 

Debtor in a nutshell

  • A debtor is a person who lends money or credit to a company or individual
  • The receiver of funds lent by a debtor is known as a creditor
  • Default refers to a debtor’s inability to meet the requirements agreed upon in the financial contract
  • Small business owners particularly will benefit from positive relationships with debtors and a solid understanding of the creditor/debtor relationship

What is a debtor?

Debtor comes from the latin ‘debere’, meaning ‘to owe’. It’s the title of a person or company who owes money to another entity. If the money they owe is to a financial institution, i.e. a bank or insurance company, then the debtor will be called a borrower. If the debt owed is in the form of bonds or other securities, then the debtor is referred to as an issuer. An institution that files for bankruptcy is legally referred to as a debtor. 

Debtor vs creditor: What’s the difference?

The counterpart to a debtor is a creditor. The creditor is the one on the opposite end of the relationship the debtor has with the financial institution from whom they’re borrowing. So if someone is wanting to take out a mortgage for a house, the hopeful homeowner is the debtor and the mortgage company is the creditor.  

Depending on the size of the loan, the creditor will perform checks to make sure they want to enter into the relationship. These checks include an assessment of the debtor’s credit history and financial situation to determine whether the debtor qualifies for the requested loan.  The debtor then makes payments until the debt is paid off. The frequency of these payments will be determined by the conditions of the loan.

Debtors and default

An important aspect of debtors and lending is default. If a debtor is unable to meet the legal requirements in the contract regarding payment, for instance if they miss payments or fail to pay the agreed amount in full, then default has occurred.

Although they share similarities, default is different from other financial scenarios like insolvency or bankruptcy. While these two concepts refer to insufficient cash to repay debts and a legal proceeding involving a court of law respectively, default simply refers to the failure to meet deadlines or payment minimums.

Why are debtors so important?

Understanding the role of the debtor in company ownership means being aware of what awaits every hopeful business owner. Almost all small business owners will have to take out loans, especially at the beginning of their venture. A successful company is not likely without debtors. 

Managing debts owed and the expectations of creditors will be a constant responsibility for any business owner. Going into debt as a small business can have dire consequences, and this is usually a result of failing to manage one’s debtor and creditor relationships.

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