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. This is also the case when you receive products or services from a supplier; you’re borrowing money from them until you’ve paid the invoice.
When it comes to loans, the loan agreement 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, while the person or business who lends money is called a creditor.
When you receive an incoming invoice, 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.
In terms of a loan, the debtor is 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.
Types of debt
There are two main categories of debt: long-term and short-term.
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 long-term debt since it 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 these short-term liabilities effectively is key to maintaining a positive cash flow, paying bills on time, and avoiding financial difficulties.