Accounting terms

Dictionary of all accounting terms

What is a Creditor?

A creditor is a person, organization, company or government to whom money is owed.

A creditor is normally defined as a party that has a claim on a second party. The second party is known as the debtor. Normally, this can be simplified to a creditor being a supplier, and the second party, the customer or debtor, owes money to the supplier.

Besides that basic definition, there are other ways in which the term creditor is used. A creditor may also be the lender of properties, services or money.

In the business world, there are four types of creditors:

  • secured--the creditor has the legal right to take the specific property of the debtor or borrower and put it up for sale if the borrow defaults. In this situation, the creditor would be a bank.
  • unsecured--the creditor does not have the legal right that the secured creditor has
  • preferential or senior--the creditor takes precedence over any other creditors in laying claim to any property belonging to a bankrupt debtor or borrower
  • junior--the creditor has no precedence over other creditors, and therefore has his or her claim addressed only after the preferential or senior creditors have satisfied their claims

Creditors and debtors make official agreements before they engage in the business relationship.

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