Creditor
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2012 by Marty J.Schmidt. Revised 31 January 2012.
The Meaning of Creditor
A creditor is a party who lends money or extends credit to a company or individual. In the case of a secured loan, the creditor ultimately has some claim to the loan collateral or other of the debtor's assets, if the debtor fails to repay the loan as agreed.
Companies or individuals who buy bonds, for example, are lending money to the issuing organization and become its creditors. in the event that a bond-issuing company shuts down and is liquidated, the claims of bond holding creditors are paid first before preferred stock shareholders.
Banks that make loans to individuals or business become their creditors. Merchants who sell goods and services on credi, or with an invoice payable at some future date, become creditors of their customers. When cusotmers fail to pay on time or otherwise fail to meet payment agreements, the bank or merchant will normally still attempt for a period of time to persuade the customer to pay (e.g., 90 or 120 days). After that time, the creditor may choose to write off the amount due as a bad debt—an accounting practice that does the following:
- The write off reduces the creditor's accounts receivable on the balance sheet, a reducdtion in an asset account.
- The write off appears as an expense on the income statement, reducing rreported operating profits and net profits.
Writing off a debt by the creditor is an accounting practice, but it does not relieve the debtor of the obligation to pay. The creditor may still attempt to collect payment by engaging a collection agency, or pursue other legal means, including a lawsuit that will, if successful, end with a court order to the debtor to pay.
In cases where the debt was acquired through a secured loan (or asset-based loan), where the debtor does not pay, the creditor may acquire ownership of the collateral assets.
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