A creditor is someone who is owed money by a business or an individual. The business or individual is called a debtor.
You could also refer to it as lender and borrower.
You’re a debtor if you take up a loan from a bank, or if you receive goods and services from your suppliers and pay them later.
When do you become a creditor?
If you lend money to someone, either because you give them a straight-up loan, or—more commonly—because you sell them goods or services and let them pay for it later via invoice, you’re a creditor.
Why do you become a creditor when you invoice? It might seem strange, but when you invoice, you let the buyer pay you after they receive the goods and services—unless you have payment terms where you ask for payment in advance or upon delivery.
While waiting for the client to pay you by the invoice due date, they owe you money. In accounting terms, we’d call you a creditor and the client a debtor.
What happens if the client doesn’t pay you on time?
If the client doesn’t pay by the due date, you can add interest or late payment fees, but you should have informed them of this beforehand, either in a contract or on the invoice.
Make sure to reach out to the client to figure out why they haven’t paid: Maybe they’ve just forgotten, or maybe they need an extended due date or a payment plan. You want to avoid the money turning into bad debt, which is where the client is unable to pay you.
Worst case scenario, the debtor goes bankrupt. If so, their assets will be sold, and the creditors paid back in order of priority. You might be unlucky and end up at the back of the queue.