A debtor owes money. A creditor is owed money. In every credit transaction, there’s one of each, and understanding which role you’re playing matters enormously for how you manage cash flow, enforce your rights, and protect your business.
If you run a business in Australia, there’s a good chance you’re already acting as a creditor, whether you realise it or not. Every time you supply goods or services and invoice your client later, you’ve extended credit.
We often use jargon in the debt collection industry to clarify our work and draw legal distinctions between our clients and their debtors. The good news is that most of it is simple to learn, and it can help you understand our services and your rights as a debtor or creditor.
What is a Debtor?
A debtor is an individual or business that owes money to another entity (the creditor). If you’ve borrowed money or received goods and services that you haven’t yet paid for, you’re a debtor.
Debtors have certain financial obligations, including repaying the debt according to the agreed terms like paying interest or making regular instalments.
Example: Garments Galore is a clothing manufacturer. They order fabric in bulk from Fantastic Fabrics, worth tens of thousands of dollars. To manage their cash flow, they pay in two instalments: one before delivery and one after completing their manufacturing run. Until the second instalment is paid, Garments Galore is the debtor of Fantastic Fabrics. Even though Fantastic Fabrics isn’t a bank, they provided goods before receiving full payment, and Garments Galore is legally required to repay that debt.
What is a Creditor?
A creditor is an individual or business that has lent money to another entity (the debtor). You are a creditor if you have provided money, goods or services to someone else and they haven’t yet paid.
When you think of lending money, you probably think of major banks and lenders. But any individual or business may be considered a creditor. Banks, lenders, businesses, suppliers, service providers, and even friends and family can be creditors.
Example: Auto Loans Inc is a private lending institution. Barbara approaches them to borrow money for a new car. After checking her credit history, Auto Loans Inc lends her the money under a contract requiring repayment in regular instalments over 4 years. Auto Loans Inc is Barbara’s creditor until the loan is fully repaid.
Debtor vs Creditor: Key Differences at a Glance
| Debtor | Creditor | |
| Role | Owes money to another party | Is owed money by another party |
| Who they are | Individual, business, or other entity that has borrowed money or received goods/services and not yet paid | Individual, business, lender, supplier, or service provider that has extended credit or supplied goods/services on credit |
| Their obligation | Repay the debt according to agreed terms (instalments, interest, due date, etc.) | Recover the money owed using agreed terms, debt collection, or legal action if necessary |
| Balance sheet treatment | Appears as a current asset on the creditor’s balance sheet (money expected to be received) | Appears as a current liability on the debtor’s balance sheet (obligation to repay) |
| Legal rights | Right to fair treatment and transparent terms; right to negotiate repayment arrangements | Legal right to recover the debt through collection, court action, bankruptcy, or liquidation |
Secured vs Unsecured Creditors
There are two main types of creditors: secured and unsecured. The distinction between the two is based on the type of debt you are owed:
- Secured debt is any debt that is subject to a “security” interest. With a secured debt, the debtor is able to borrow money by using an asset (such as a house or car) as collateral. Typically, this means the creditor has a right to repossess the secured asset if the debtor doesn’t repay the loan.
- Unsecured debt is any debt that isn’t subject to a security interest. Unsecured debts include things like personal loans, credit cards, or goods and services a debtor has received but hasn’t yet paid for.
Secured and unsecured creditors both have a legal right to recover the money they’re owed.
If your business supplies goods on credit, you may be able to protect your position by registering a security interest on the Personal Property Securities Register (PPSR). A registered purchase money security interest (PMSI) can give you priority over other creditors if the debtor defaults or becomes insolvent. A contract lawyer can advise whether this applies to your situation.
Can a Business Be Both a Debtor and a Creditor?
Yes, and most businesses are. You might be a creditor to your clients (who owe you for work completed) while simultaneously being a debtor to your suppliers (who you haven’t paid yet). This dual role is a normal part of doing business on credit terms.
The challenge is managing both sides of the ledger at once. If your debtors are slow to pay while your creditors are expecting payment, you can find yourself in a cash flow squeeze even if your business is profitable on paper. This is one of the most common causes of business failure in Australia.
How to Manage Your Risk as a Creditor
Reducing your risk is the best thing you can do as a creditor. Here are a few tips on avoiding client debt:
1. Set Clear Payment Terms
Contracts are the biggest risk factor for creditors. If the terms of your payment agreement are poorly defined, it increases your risk of bad debt.
We recommend working with a contract lawyer to develop a standard payment agreement that meets your cash flow needs. This agreement states how your goods and services are delivered, and the payment terms the debtor is required to meet.
2. Issue Invoices Immediately and Follow Up Regularly
Invoicing and managing debt payments is time consuming. The longer you put it off, the harder it is to get paid.
Issue invoices as soon as possible and follow up with your debtor at regular intervals until the debt is paid. Try setting reminders that will prompt you to contact your debtor. A quick phone call or email is all it takes to help your debtor remember that their payment is due soon!
3. Offer Incentives to Encourage On-Time Payment
Debtors can be incentivised to pay early (or on time) through things like discounts and bonus offers. For example, you could offer a small discount on the invoice total for early payment.
Make sure any incentives you provide are clearly stated and that the debtor understands the terms of the agreement.
4. Request a Down Payment
It’s common practice to request partial (or full) payment before you supply goods and services.
Accepting a down payment gives you cash you can use while the work is ongoing and reduces the impact if the debtor is slow to pay their invoice. For large jobs, you can consider accepting multiple payment instalments, rather than trying to invoice for the full amount at the end of the agreement.
5. Communicate With Your Debtor
If you take too long to send or follow up an invoice, or if your debtor has a chance to forget about the debt, it becomes much harder to recover your money.
Create a system where you’re regularly communicating with your debtor. This may include contacting them even if they’re up to date on their payments.
The goal is to stay at the top of their mind and let your debtors know that you’re approachable. That way, if they do have an issue paying a debt on time, they’ll be more likely to contact you and discuss alternative arrangements.
How Creditors Recover Money from Debtors
If you or your business is acting as a creditor and your debtor can’t or won’t repay their debt, you can recover your money in a few ways:
1. Debt Collection
Commercial debt collection is your best chance of receiving payment. Many debtors stop paying their debts because they’re unable to keep up with the terms of your agreement.
That can put your business in a bad position. If debtors can’t pay, you won’t have the cash you need to meet your own obligations, which can quickly get out of hand. Working with a professional debt collector can help you recover more of your money in less time.
Debt collectors prefer to negotiate payment plans that help the debtor meet their obligation. This allows you to meet your cash flow requirements without damaging the relationships you hold with valuable customers.
2. Legal Action
In Australia, creditors have a legal right to the money they are owed. If a debtor can’t or won’t repay their debt, you may be able to take legal action against them.
We strongly recommend pursuing other debt recovery methods if possible. Legal action is complex and can be a drawn-out process.
Taking legal action may be the best course of action if there is a dispute between you and your debtor.
If you pursue legal action and successfully obtain a judgement against your debtor, there are several legal means you can use to recover the money you are owed:
- Seizing and selling assets – A warrant for the seizure and sale of property allows an officer to seize the debtor’s property and sell it at public auction. Proceeds from the auction are applied directly to the debt.
- Redirection of debt and earnings – Courts can grant a warrant for the redirection of debts or earnings, also known as “garnishing wages”. Garnishing wages allows a creditor to recover a debt directly from the debtor’s employer, bank or another entity that holds money on behalf of the debtor.
- Payment by instalments – The court can issue an order for Payment By Instalments. This requires the debtor to pay you in regular amounts over an agreed period of time. An order for payment instalments will only be granted if the timeframe is reasonable and the debtor is reasonably able to afford the payments.
You can learn more about what debt collectors can do if you don’t pay on our blog.
3. Bankruptcy
If you are owed $10,000 or more by a private individual, you can apply to the court to make them bankrupt. During bankruptcy, the debtor’s assets will be liquidated, and the creditors will each receive a share of the money.
Secured and unsecured debts are treated differently in bankruptcy:
- If you are a secured creditor and your debtor is bankrupt, you retain your right repossess and sell your security interest. The debt typically isn’t included in the debtor’s bankruptcy. If the security interest is sold for less than the outstanding debt balance, the shortfall can be included in the debtor’s bankruptcy.
- If you are an unsecured creditor and your debtor is bankrupt, you will receive a payment from the bankruptcy estate. Payments are made in a predetermined order.
Bankruptcy is an inefficient way to recover debts. The Australian Financial Security Authority (AFSA) reports that unsecured creditors receive just 2.23 cents for every dollar they are owed. Bankruptcy should be considered a last resort.
4. Liquidation
If you are owed $4,000 or more by a debtor business, you can apply to the court to have a Liquidator appointed. Similar to bankruptcy, the debtor business will be liquidated, and creditors will be paid a share of the money.
Liquidation typically provides very low returns to creditors and should be avoided if possible.
Protect Your Business with Debt Recovery from Dynamic Commercial Collections
While you probably think of banks and lenders as “creditors,” there’s a good chance your business acts as a creditor for many of your customers. Playing the role of creditor is a great way to expand your business and build trust, but it can put you in a vulnerable position.
If your business is left holding bad debt, then it’s time to contact Dynamic Commercial Collections. We offer professional debt recovery services to individuals and businesses in Brisbane, Bundaberg and Perth. We work with individuals and businesses, providing expert debt collection and field services that maximise your returns.
We take pride in using the latest technology and ethical recovery tactics to collect outstanding debts. That’s good news for your business, and it’s good news for your debtors. Contact us today for a consultation and to find out more about recovering the debts you are owed.