What is a debtor and what is a creditor

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    Credit control & accounts receivables

    What is a debtor and what is a creditor

    In this blog post, we'll explain what a debtor is and what a creditor is, give examples of each, and discuss the consequences of having too much bad debt. We'll also provide tips on how to manage bad debt and debtors, and how to prevent bad debt from building up. 

    What is a creditor?

    A creditor is a person or entity to whom money is owed. The debtor is the person who owes the money.

    Creditors can be banks, credit card companies, loan officers, businesses, or individuals. When you borrow money from someone, they become your creditor.

    For example, let's say you take out a loan from the bank to buy a car. The bank is now your creditor.

    There are two types of creditors, loan creditors and trade creditors.

    Loan creditors are creditors who lend you money that must be repaid with interest. Trade creditors are suppliers who extend your credit to purchase goods or services.

    What are the consequences of having a lot of creditors?

    If you have a lot of creditors, it can be difficult to keep track of who you owe money to and when you need to make payments. This can lead to missed payments, which can damage your credit score.

    It can also be difficult to get approved for new loans or lines of credit if you already have a lot of creditors. This is because lenders will see you as a higher-risk borrower.

    How to manage your business’s creditors

    Managing your creditors can be a challenge, but there are some things you can do to make it easier.

    One way to manage your creditors is to set up a system for tracking payments. This can help you stay organised and avoid missed payments. You can also use tools like automatic bill pay to make sure your bills are paid on time.

    Keep track of who you owe money to and when payments are due. This will help you budget your money and make sure you don’t miss any payments.

    Another way to manage your creditors is to negotiate payment terms. This can be helpful if you’re having trouble making payments on time. You can also try to consolidate your debts into one loan with a lower interest rate.

    Communicate with your creditors if you’re having trouble making a payment. They may be willing to work with you to make a payment plan or lower your interest rate.

    If you’re struggling to manage your creditors, there are organizations that can help. Credit counselling services can help you create a budget and negotiate with creditors. Some nonprofit organizations also offer debt management programs.

    Prioritize paying off your high-interest-rate creditors first. This will save you money in the long run as you won’t be paying as much in interest.

    What is a debtor?

    A debtor is a person or entity who owes money to someone else. In the example above, you are the debtor because you owe money to the bank.

    In the UK, there are two types of debtors: private individuals and companies.

    Private individuals are natural persons who have taken out a loan or credit from a financial institution. Companies are legal entities that have incurred debt in the form of loans or credit from suppliers.

    What are the consequences of having a lot of debtors?

    For any business, having a lot of debtors can be problematic. This is because it means that the business is owed a large amount of money, which can put a strain on its cash flow.

    If a business has to constantly chase debtors for payment, this can take up a lot of time and resources. In extreme cases, businesses may even have to resort to legal action to recover the money that is owed to them.

    Consistent late payments can be very costly and can negatively impact a business's bottom line. In some cases, it can even lead to the business having to close its doors.

    How to manage your business’s debtors

    There are a number of things that businesses can do to manage their debtors.

    Firstly, it is important to have a clear and concise credit policy in place. This should set out the terms on which you are prepared to extend credit to customers, as well as the consequences of failing to make payments on time.

    It is also important to conduct regular credit checks on new and existing customers. This will help you to identify those who may be high risk and therefore, more likely to default on payments.

    If you do extend credit to customers, it is important to keep a close eye on their payment history. If you see that they are starting to fall behind on payments, you can take action to try and recover the debt before it becomes too large.

    Segmenting your customers into different risk categories can also be helpful. This means that you can tailor your approach to chasing payments depending on the level of risk involved.

    If you are struggling to recover debts from customers, there are a number of specialist debt collection agencies that can help. They will usually charge a fee for their services, but it may be worth it if you are struggling to get the money that you are owed.

    How do you know if you have too many debtors?

    Your DSO (days sales outstanding) is a good indicator of whether you have too many debtors. This is calculated by dividing your total credit sales for a period by the number of days in that period and then multiplying by the number of days in the year.

    For example, if your annual credit sales are £100,000 and you have an average of 30 days of credit outstanding, your DSO would be:


    (£100,000/30) x 365 = 122 days


    This means that, on average, it takes you 122 days to collect payment from your customers.

    A high DSO can be a sign that you are struggling to collect payments from your customers promptly. It can also put a strain on your cash flow, as you may have to wait a long time to receive payment for goods or services that you have already delivered.

    What is bad debt?

    Bad debt is when a customer owes you money, and you are not going to be able to get this money back. This can happen for a number of reasons, but the most common reason is that the customer is unable to pay.

    If you have customers who owe you money, it is important to try and recover this debt as soon as possible. If you let the debt build up, it can have a negative impact on your business.

    There are a number of ways to recover bad debt, but the most common way is to use a debt collection agency. However, there are certain drawbacks to using an agency, such as the cost and the impact it can have on your customer relationships.

    Another way to recover a debt is to take legal action. This can be a costly and time-consuming process, but it is sometimes the only way to get the money you are owed.

    How to avoid bad debt

    The good news is that there are a number of things you can do to avoid bad debt. Including:

    Credit check your customers

    One of the most important things you can do is to screen your customers carefully. This means doing a credit check on new customers and making sure that they have the ability to pay their bills.

    But the credit checking shouldn't stop there. You should also regularly check the creditworthiness of your existing customers. This will help you to identify any potential problems early on and take steps to avoid them.

    Offer payment terms that suit your business

    Another way to reduce the risk of bad debt is to offer payment terms that suit your business. For example, you might want to consider offering a discount for early payment or requiring customers to pay a deposit upfront.

    Change your invoicing process

    The way you invoice can also impact how likely you are to get paid on time. Many businesses make the mistake of invoicing too late. This gives customers more time to forget about the bill or put off paying it. To avoid this, try invoicing as soon as the work is completed. You could even set up a system where customers are automatically invoiced as soon as the work is done.

    Be proactive about chasing payments

    Of course, even if you do all of the above, there will still be times when customers don't pay on time. When this happens, it's important to be proactive about chasing payments. The sooner you chase a late payment, the more likely you are to get paid. And, if you have a good relationship with the customer, they may be more willing to work with you to find a solution.

    Have clear terms and conditions

    You should also set clear payment terms and conditions and make sure that your invoices are clear and easy to understand. If your customers know exactly when they need to pay, and what will happen if they don't, they're much more likely to stick to the terms.

    Call on the experts

    If you've chased your customers for payment, but they are ignoring your emails and phone calls and the invoice remains unpaid, you can always outsource the task to a debt collection agency. They'll be experienced in getting the money that's owed to you, and they'll often be able to do it much faster than you could yourself.

    It's always a good idea to choose a debt collection service that prioritises mediation over aggression, as this will usually result in a happier outcome for both parties - even if it does take a little longer to get there.

    How Chaser can help

    As experts in credit control, we can help you to get paid on time, every time. We'll work with you to understand your business and then tailor our services to suit your needs - whether that's offering our credit control software so that you can automate the accounts receivable process, or acting as your debt collector and helping you get your old, bad debt paid. 


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