Debt is money that you’ve borrowed from someone and that you have to repay. It can be borrowed from an individual, a business, or a bank.
When you borrow money, you create a debt. The borrower can also be called a debtor. The person or business who lends money is called a creditor. The financial agreement between the debtor and the creditor usually includes a specific payment plan and a due date for the loan to be paid back. Often the payments are scheduled as fixed monthly amounts.
Debtor and creditor
The person or business that owes money is called the debtor. They are responsible for meeting the terms of the payment plan that was agreed upon before the loan was given. The creditor is the one providing the loans. Creditors can be banks, other financial institutions that offer loans, or businesses waiting to be paid for their goods or services.
When you receive products or services from a supplier you are borrowing money from them until you’ve paid the invoice. In this relationship, you’re the debtor and the supplier is the creditor. When you invoice your clients, you’re the creditor and they’re the debtor, until the invoice has been paid.
Types of debt
Long-term debt
Long-term debt includes debts that are not due within the year, such as loans from a bank. It’s important to thoroughly understand the terms and conditions of these loans since they can affect your financial health for many years.
Short-term debt
Short-term debt, on the other hand, needs to be settled within a year and typically includes invoices from suppliers or tax due to the tax authorities. Managing short-term debt effectively is key to maintaining a positive cash flow, paying bills on time, and avoiding financial difficulties.