A debtor is an individual or business that owes money to another individual or business. Debt is one of the most common forms of financing businesses use to grow and maintain their operations. Companies can issue debt to the public in the form of bonds or they can acquire debt from a bank or loan institution.
Officer loans are also a common form of debt in smaller companies. It's not uncommon for a family run business to borrow money from one of the officers instead of going to the bank for financing.
As with all debt, companies must analyze their debt to equity ratio and quick ratio to properly manage their debt level. Some companies borrow too much money and can't afford the interest payments over time. It's important for businesses to examine these ratios before accepting another loan.
If a company's debt ratios are too high, it might be in its best interest to finance its expansion or operations using equity financing.
Companies can also loan money to other companies or individuals. This makes the company the lender and the other entity the debtor. The most common form of companies lending money is in the form of store credit cards. Every major retailer has its own store card. If you buy a shirt on your Macy's store card, you are essentially borrowing the cash for that purchase from Macy's. Macy's would record this transaction in its accounts receivable until you paid for the shirt in cash.
Search for more articles about Debtors:
Back to Accounting Terms