Written byA debtor is a person or business that owes money to someone else, whether under a loan, a credit account or an unpaid invoice.
Also known as: trade debtor, borrower, account debtor
Key points
- In business accounting your debtors are the customers who owe you money, shown on the balance sheet as receivables.
- Slow-paying debtors are a common cause of cashflow pressure, which is why invoice terms and follow-up matter.
- You can turn unpaid invoices into working capital using factoring or invoice discounting.
- If a debtor never pays, the amount is eventually written off as a bad debt.
- When you borrow, you are the debtor: missed repayments put you in arrears and can show on your credit file.
Debtors in a business
Every invoice you issue on terms creates a debtor. Accountants track them by age, grouping balances into current, thirty, sixty and ninety days, because the older a balance gets the less likely it is to be paid in full. Debtor days measure how long the average customer takes.
The gap between doing the work and being paid for it is where most small business cashflow trouble starts. Clear terms, prompt invoicing and steady follow-up do more than any finance product. Where the gap is structural, a facility secured against the debtor ledger can bridge it.
When a debtor cannot pay
If a customer or borrower stops paying, the account slides into arrears and then default. A creditor will usually try to arrange a payment plan first, because getting something back beats writing the whole balance off. Beyond that comes formal demand, collections and legal recovery.
For an individual debtor, missed payments can be recorded on a credit file and affect a credit rating for years. Anyone in genuine difficulty can ask a lender for hardship assistance, and free financial counselling is available. It is far better to raise it early than to let the account run.
Example
A Perth signage business invoices on thirty-day terms. At the end of the quarter its debtor ledger shows $60,000 outstanding, and a third of it is more than sixty days old. Wages and materials still have to be paid on time, so the owner is funding customers out of her own pocket. She tightens terms for new work, chases the ninety-day accounts personally, and arranges an invoice finance facility so she can draw against approved invoices instead of waiting for the money to land.
Not to be confused with
- Receivables
- receivables are the amounts owed; debtors are the people or businesses that owe them
- Bad debt
- a bad debt is the write-off at the end; the debtor is the party who did not pay
Frequently asked questions
What is the difference between a debtor and a creditor?
The debtor owes the money and the creditor is owed it. Most businesses are both at the same time: a creditor to customers who have not paid, and a debtor to suppliers, lenders and the ATO. Which label applies depends entirely on which side of the invoice you are on.
What are debtor days?
Debtor days measure how long, on average, customers take to pay. You divide the debtor balance by annual sales and multiply by 365. A rising number means money is being collected more slowly, which squeezes cashflow even when sales look healthy.
What happens if a debtor does not pay?
The creditor usually starts with reminders and a payment plan, then a formal demand, then a collection agency or court action. Company debts may attract a statutory demand. If recovery fails, the creditor writes the amount off as a bad debt and may be able to claim back the GST.
Is a debtor an asset?
Yes. Amounts owed to your business are current assets on the balance sheet, listed as trade receivables. They are not cash yet, though, which is why a business can show a profit and still run out of money. Lenders often discount older balances when assessing the ledger.
Can I borrow against my debtors?
Yes, through invoice finance. Factoring sells the invoices to a financier who also collects them, while invoice discounting advances funds against the ledger and leaves collection with you. Both release cash sooner, and both cost money, so compare the fees against the benefit of being paid earlier.
Related terms
Receivables
Receivables are amounts owed to your business, mainly by customers for goods or services supplied on credit, recorded as assets on the balance sheet until they are collected.
Read definitionFactoring
Factoring is a finance arrangement where a business sells or assigns its unpaid invoices to a specialist lender, the factor, for an immediate cash advance and outsourced collections.
Read definitionInvoice discounting
Invoice discounting is a working capital facility where a lender advances most of an unpaid invoice's value and holds a reserve until your customer pays.
Read definitionBad 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 definitionCash flow
Cash flow is the movement of money into and out of a business over a period; unlike profit, it tracks actual receipts and payments, so it measures liquidity.
Read definitionArrears
Arrears are overdue repayments on a loan or credit account: the borrower has missed instalments, which the lender tracks by days past due and which can lead to a default.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.