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NADefinition
A creditor is an individual or organisation that lends money or extends credit to another party, with the expectation of being repaid under agreed terms.
What it means
Creditors provide funding to businesses or individuals in the form of loans, trade credit, bonds, or other credit facilities. In return, they are entitled to repayment of principal and, in most cases, interest.
Creditors have a legal claim on the borrower’s assets or cash flows, which may be secured or unsecured depending on the agreement.
Types of creditors
- Secured creditors: Have a claim over specific assets used as collateral
- Unsecured creditors: Do not have collateral and rely on the borrower’s creditworthiness
- Trade creditors: Suppliers that allow payment at a later date
- Financial creditors: Banks, lenders, and bondholders
Example
A bank that provides a $500,000 business loan is a creditor. A supplier allowing a company 30 days to pay an invoice is also acting as a creditor.
Why creditors matter
- Provide essential funding for growth and operations
- Have priority over shareholders in repayment
- Play a key role in restructuring or insolvency situations
Important to note
In the event of insolvency, creditors are paid before equity holders, though the order of repayment depends on whether the debt is secured or unsecured.
Overall, creditors are central to how businesses finance themselves and manage cash flow.
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