What is a Creditor?
Usually, a creditor is an individual or a business that can lend money to another business for its operation. Usually, these private loans come at high-interest rates and steep terms but can sometimes be the only option available to business ownears who require funds. The business that goes into an agreement with a creditor is normally known as the debtor, so essentially a debtor is an individual or business that owes money to a creditor.
Is being a creditor a legitimate business?
There are many legitimate creditors in the UK. Typically, legal agreements made between the debtor and the creditor are signed by both parties. Within them, there is all the information regarding the terms of the agreement. If the creditor has requested that, this could include a timeline for repayment, interest rates, and security.
Usually, as a business owner, you will encounter two different types of creditors. One is known as loans, a bank usually provides these, and the second one would be trade creditors. Trade creditors are entities that often supply the materials needed for the production of a product upfront. Frequently, they may be paid after the product has been completed. To learn more about the different types of creditors, you can read an article on the types of creditors by clicking here.
If the business you lend money to goes into debt as a creditor, you are also legally entitled to register as a creditor in bankruptcy or liquidation. This means that you will be added to the list of creditors that the debtor owes money to, and you will be receiving information about the case and even be allowed to vote if there is a creditor’s meeting. To learn more about registering as a creditor in a bankruptcy case, you can refer to the government’s article on the topic by clicking here.
What are the differences between personal and real creditors?
You may have heard the terms real and personal creditors before, and questions may have arisen about the difference between the two. Well, the difference is quite simple. Personal creditors are people who will lend money to family or friends. Frequently, there is no contract or guarantee involved, and it is something that people do to assist those closest to them.
By contrast, actual creditors include business and financial entities such as banks or finance companies. There are usually legal contracts that both the debtor and creditor will agree on in these cases. Sometimes, these contracts will even allow the creditor to take some of the debtor’s assets if they do not uphold their loan terms and not pay it back in the timeline dictated.
To learn more about real and personal creditors and some of the key differences between the two, we recommend reading an article about them by clicking here.
The main thing that you need to remember when it comes to these two types of creditors is that, in most cases, a personal creditor cannot claim back the money as quickly. In contrast, a real creditor has within the contract dictated everything from the timeline to the guarantee to ensure that they will not be losing money at the end of your deal.
What is usually included in the terms that a creditor will make you sign?
What might be included in the terms will likely depend on the creditor that you are dealing with. Typically, there is always a timeline for paying off the debt as well as the interest rate that you will be called to agree on prior to signing. Depending on the creditor, you may also slightly negotiate those rates, but that may not always be the case.
There is also the matter of security that is most often discussed during those meetings. For the creditor, lending you money can be a small or high-risk financing opportunity. In any case, they will most likely want some kind of assurance that their money will be paid back. Often, you may be called to provide a guarantee. This could be your home, your business premises if you own them, or anything else that the creditor may approve as a guarantee. Essentially, the guarantee is something of high value that can pass into the creditor’s possession if you are unable to pay off your debt to them.
While debt to a creditor is less than ideal, sometimes it is necessary for many businesses wishing to stay afloat. What is important is that you create a plan even before taking on the debt about how you will repay it. This will help you negotiate better terms and know what your overall goal is in the long run.
Suppose you are currently looking for funds for your small business, but you are not sure you want to go into debt. In that case, we recommend that you read the following article that will give you valuable tips for getting money for your start-up small business by clicking here.
Other useful links from our knowledge centre:
Can a Business Refuse Cash?
How Does Brexit Affect Business
What is Liquidity in Business?
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