If you’re new to running a business, there’s a fair amount of terminology that suddenly applies to your role. It can get pretty confusing and perhaps a little overwhelming at times, which is why the team at TreyBridge Accountants is dedicated to helping new business owners to achieve clarity by explaining these things in no-nonsense language.
A common query made by start-up owners revolves around creditors and debtors, so this article delves into what it all means and how it can affect a business.
What is a creditor?
Creditors are individuals, businesses and organisations that are owed money by your business. In other words, they have offered you credit that needs to be paid back.
There are two types of creditors:
— Loan creditors: These are organisations such as banks, building societies and other financial institutions that have leant you money in some way, like overdrafts, loans and credit cards.
— Trade creditors: These are suppliers that you owe money to for services already supplied, such as your IT systems, office furniture, inventory and other items that are required in order for your business to run smoothly.
How to manage your credit
When you owe money to a business or organisation, they are the creditor and you are the debtor. There are multiple ways to achieve best practice as a debtor, such as:
- Always pay your bills on time.
- Make sure to include references where required when making payments (e.g. a PO number, account number or anything else requested by the creditor for their accounts).
- If you ever find yourself struggling to pay your creditors, contact them immediately to see if your payment terms can be changed.
- Retain documentation of all transactions, as this way you can prove that you’ve made your payments.
- Maintain open communication and always reply to your creditors’ enquiries in a timely fashion.
- Build and nurture strong working relationships with your suppliers. Recommend them to your clients and send them referrals whenever possible. This will help to keep your reputation strong and could facilitate further collaboration in the future.
What is a debtor?
As briefly mentioned above, a debtor is a person or business that owes another business money. When someone owes your business money, they are therefore your debtor, as they owe you a debt.
Generally speaking, debtors will pay their debts through an agreed payment plan. This could be anything from two to three large lump sums to dozens of smaller payments on a monthly basis over the course of a few years. Interest may be included as part of the deal – it all depends on who has offered the goods and services in advance.
How to manage debt owed to you
Having one or more debtors is a common situation, although it can sometimes lead to cash flow issues if the debts aren’t always paid in full or on time by your debtors.
In the event that a debtor falls on hard times and can’t pay their instalments, what they owe may become a bad debt. This is when the company or individual you extended credit to can’t make the payments now or in the future and the debt has to be written off.
Needless to say, you don’t want to have to write off even a penny owed to you, so here are some ways to minimise the risk of bad debts:
- TreyBridge Accountants offers affordable and effective credit control services, chasing the debts on your behalf. This saves you a lot of time and stress, as it can be a very difficult task for many business owners to carry out themselves.
- Preventing late payments is even better. TreyBridge Accountants offers a credit management system that involves assessing the risk connected to potential customers before you begin a relationship with them. Their finance specialists also recommend how much credit to extend to each one, as this gives you total control over your finances and cash flow management.
A quick recap
- If a business owes you money, they are your debtor.
- If you owe a business money, you are their debtor.
- If a business has offered you any form of credit, they are your creditor.
- If you have offered any form of credit to a business, you are their creditor.
- The vast majority of businesses are debtors and creditors, as they will both take out and offer payment plans for goods and services.
Credit control for small businesses
If you have debts owed to you, it’s time to get in touch with TreyBridge Accountants and ask about credit control services.
