Written byA creditor is a person, business or lender that is owed money by someone else, usually under a loan, an invoice or a supply agreement.
Also known as: trade creditor, secured creditor, unsecured creditor
Key points
- A secured creditor holds security over an asset; an unsecured creditor relies only on a promise to pay.
- Trade creditors are the suppliers you owe, and they show as accounts payable on your balance sheet.
- If an invoice stays unpaid, a creditor can chase it, pass it to collections, or sell the debt.
- In a liquidation, secured creditors are generally paid ahead of employees and unsecured creditors.
- One invoice makes one party a creditor and the other a debtor, so the label depends on which side you sit.
How creditors get paid
Most of the time a creditor is simply paid on terms: seven days, thirty days, or a monthly repayment under a contract. When payment stops, the account falls into arrears and the creditor moves through reminders, formal demands and, if that fails, legal recovery.
For a company debt over the statutory amount, a creditor can issue a statutory demand, which gives the company a limited window to pay or dispute before it is presumed insolvent. Consumer debts follow a different path, governed by the debt collection rules that ASIC and the ACCC enforce.
Secured and unsecured creditors
The difference matters most when money runs short. A secured creditor has registered an interest over an asset, often on the Personal Property Securities Register, and can take and sell that asset if the borrower is in default. Equipment financiers and mortgage lenders sit here.
An unsecured creditor, usually a supplier or a card issuer, has no asset to fall back on and joins the queue behind secured creditors and employees. That is why suppliers ask for a personal guarantee or trade credit insurance, and why unpaid balances often end as a bad debt.
Example
A steel fabricator in Adelaide owes three parties. Its equipment financier is a secured creditor, with an interest registered over the press brake. Its steel supplier is an unsecured trade creditor, owed for two months of deliveries. The ATO is owed PAYG withholding. When a big customer collapses and cashflow tightens, the financier has the strongest position because it can recover the machine. The ATO and the supplier both rank as unsecured creditors, though the ATO has its own recovery powers. The supplier, with no security and no such powers, moves the account onto cash on delivery and asks the directors for a personal guarantee before shipping more steel.
Not to be confused with
Frequently asked questions
What is the difference between a creditor and a debtor?
They are two ends of the same debt. The creditor is owed the money, the debtor owes it. A single business is usually both at once: a creditor to the customers who have not paid its invoices, and a debtor to its own suppliers, lenders and the ATO.
What can a creditor do if I do not pay?
Start with reminders and a formal demand, then refer the account to a collection agency or sell the debt. Beyond that they can sue for the amount, and a secured creditor can recover the asset it holds security over. For company debts they may issue a statutory demand.
Who gets paid first when a company goes under?
Broadly, secured creditors are paid from the assets they hold security over, then the costs of the administration, then employee entitlements, then unsecured creditors share whatever is left. Unsecured creditors often recover only part of what they are owed, or nothing at all.
What is a secured creditor?
A creditor that has registered an interest over specific property, such as a vehicle, machine or house. If the borrower defaults, the secured creditor can take and sell that property to recover the debt, ahead of anyone without security. Equipment financiers and home lenders are the common examples.
Can a creditor take my assets?
Only through a proper legal process. A secured creditor can recover the asset named in its contract, following the notice requirements that apply. An unsecured creditor must first obtain a court judgment before it can enforce against property or wages. Free financial counselling is available if you are struggling.
Related terms
Bad debt
A bad debt is an amount owed to your business, usually an unpaid invoice already counted as income, that you cannot recover despite reasonable efforts and so write off.
Read definitionLiquidation
Liquidation is the process of winding up a company: a liquidator takes control, sells its assets, pays creditors in a set order of priority and the company is deregistered.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionUnsecured loan
An unsecured loan is credit you borrow without pledging collateral, so the lender relies on your income, credit history and capacity to repay.
Read definitionCollections
Collections is the recovery process a lender, creditor or business runs when payments fall overdue: reminders, calls, payment plans and hardship offers, then referral to agencies or legal action.
Read definitionDebt collection regulations
Debt collection regulations are the laws, guidance and licensing rules that govern how creditors and collectors may behave when recovering money owed, including bans on harassment and misleading conduct.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.