A debtor is someone who owes money to a business or an individual. The business or individual is called a creditor.
A debtor is a person or a business who has borrowed money, or received goods and services with the promise to pay later, such as purchases made with a credit card or goods and services that are paid via invoicing.
If you sell something to a client and they pay later via invoice, you’re the creditor and they’re the debtor because they owe you money. You can also call your business a lender and the client a borrower.
The money they owe you is considered an asset in your business.
What happens if they don’t pay?
If the debtor doesn’t pay on time, for example if you’ve got a client who has an outstanding invoice, you should follow up with them promptly and send them payment reminders. If you’ve informed them of it beforehand, either in a contract or on the invoice, you can add late payment fees or interest.
If you still don’t receive the payment, you can try going via a debt collection agency.
Worst case scenario, the debtor declares bankruptcy. In that case, you might get your money, depending on how many assets the business has left, and how much money they owe to various other creditors.
When do you become a debtor?
If your business takes out a loan at the bank, you’re considered a debtor intil you repay the loan. The same goes, if you get an invoice from a supplier for goods and services you’ve received—you’re a debtor until you pay the invoice.
If you don’t pay your creditors, it can impact your credit score, damage your business’ reputation, lead to you having to pay late fees and interest, and—in extreme cases—you might have to declare your business bankrupt.