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A creditor is an individual, business, or financial institution that lends money or provides goods and services on credit. In other words, a creditor is someone your business owes money to.
Managing creditors properly is crucial for maintaining a healthy cash flow and avoiding late payment penalties. By ensuring payments are made on time, businesses can maintain strong relationships with suppliers and lenders while avoiding unnecessary financial strain.
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Creditors and debtors are often confused, but they represent opposite financial transactions:
Creditors: Entities to whom your business owes money. These are liabilities recorded under the liabilities section of the balance sheet.
Debtors: Customers who still need to pay your business. These are receivables recorded under the assets section of the balance sheet.
Example: Suppose you purchase office supplies from a supplier on credit. In this case, you are the debtor because you have an outstanding payment. Conversely, if your business issues an invoice to a client who has not yet paid, that client is your debtor. Understanding this distinction is crucial for accurate bookkeeping and financial planning.
Check out our article on the difference between creditors and debtors for a more detailed explanation.
On a balance sheet, creditors are recorded under liabilities because they represent money that a business owes. There are two main types of creditors in accounting:
| Assets | Liabilities | ||
|---|---|---|---|
| Fixed Assets | Equity | ||
| Property | 100,000 | Capital Investment | 50,000 |
| Equipment | 40,000 | Retained Earnings | 20,000 |
| Vehicles | 30,000 | Profit Balance | 10,000 |
| Current Assets | Long-Term Liabilities | ||
| Inventory | 20,000 | Business Loan | 75,000 |
| Accounts Receivable (Debtors) | 16,000 | ||
| Liquid assets | 30,000 | Short-Term Liabilities | |
| Bank Balance | 60,000 | Accounts Payable (Creditors) | 20,000 |
| Taxes Payable | 5,000 | ||
| Total Assets | 276,000 | Total Liabilities | 276,000 |
Cash flow to creditors refers to the amount of cash a business pays to settle its liabilities with creditors.
The formula to calculate this is: Cash flow to creditors = interest paid + debt repayments – new borrowings
Example calculation:
Interest paid: €5,000
Loan repayment: €20,000
New loan borrowings: €10,000
Cash flow to creditors = €5,000 + €20,000 – €10,000 = €15,000
A positive cash flow to creditors means the company is repaying more debt than it is borrowing, while a negative cash flow indicates new borrowing exceeds repayments. Managing creditor cash flow efficiently prevents liquidity issues and improves financial stability.
Using Payt allows you to efficiently manage both creditors and debtors, strengthening your company’s financial position. Here are the key benefits:
By using Payt, you can save up to 80% of your administrative time and ensure invoices are paid 30% faster.
Discover how Payt can optimize your creditor management today.
Creditors typically report payment activity to credit bureaus every 30 to 45 days.
Most creditors report to credit bureaus monthly, but reporting frequency can vary.
Creditors in a business are entities that have provided goods, services, or loans on credit, and are owed money by the company.
Your creditors can include suppliers, banks, landlords, and financial institutions that your business has outstanding payments with.
