What’s The Role Of The Debtor-Creditor Relationship In Business?

All businesses have a vast range of essential trading relationships that keep their company operating and making a profit. This includes creating a good relationship with their customers, as well as maintaining a strong debtor-creditor relationship. In order to fully understand the debtor-creditor relationship, it’s important to explain the individual role of the ‘debtor’ and the ‘creditor’ respectively. Let’s take a closer look at what this entails. 

Debtor Vs. Creditor – What’s The Difference?

A debtor is a company or individual that owes money to another party i.e a creditor. The company has full responsibility for the debt and remains a ‘debtor’ until the money is repaid in full.

On the contrary, a creditor is a party that is owed money by another party i.e a debtor. The most common type of creditors are banks or financial institutions that lend funds to debtors that are then paid back over time with interest.

Why Is The Debtor-Creditor Relationship Important?

Managing the debtor-creditor relationship effectively is essential for maintaining a steady cash flow in your business and for ensuring it has the necessary means to support future growth. In simple terms, a strong debtor-creditor relationship can really make the difference between a business thriving or failing.

The key to securing a healthy debtor-creditor relationship is planning out realistic repayment plans, maintaining strong communication and staying on top of payments. Conflict can start to arise when debtors fall late on payments, and creditors may be forced to instigate debt collection processes.

In order to prevent this, it’s important that business directors are organised, focussed and proactive in managing their company’s finances. 

How To Maintain A Healthy Debtor-Creditor Relationship

It’s important that debts are paid on time for both debtor and creditor. When debtors fail to make payments on time, they may be subject to late payment fees and if the situation escalates, action could be taken against them to recover the debt. In the most severe cases, this may result in insolvent companies being forced into compulsory liquidation. It’s equally as crucial for creditors to receive payments on time in order to protect their assets and sustain their business for future growth. 

This can be achieved by:

Establishing Clear Payment Terms

Establishing clear payment terms is essential for both parties involved. Creditors need to set out exactly when payments are due, and what the penalties are for late payments. It’s essential that the terms are crystal clear for both parties in order to prevent conflict and confusion. As part of this, it’s crucial that creditors send invoices accurately and on time, and it’s also a sensible idea to send out payment reminders.

Opening Up The Lines Of Communication

Communication is a vital part of building any professional working relationships, and it’s no different when it comes to securing a healthy debtor-creditor relationship. Keeping the lines of communication open is essential for each party being able to raise any concerns that they might have, and to ensure that they can work together to keep on track with the payment plan. 

Acting Promptly At The First Signs Of Trouble

As a debtor, if your business is starting to struggle financially, and you’re concerned that you may fall behind on payments, it’s essential to act promptly. Communicate with your creditors, and explain why you’re struggling with payments, reassuring them of your intent to pay when you can. They may be able to help offer a solution, and if anything, it will reassure them. For example, HMRC will sometimes offer a ‘Time To Pay’ scheme that allows companies to repay their tax bills in instalments.

If you think that your business is facing insolvency, you should consult the advice of a licensed insolvency practitioner as soon as possible. They will help you negotiate with creditors, and establish the best solutions for your business’ requirements.

If you have any concerns that your company is struggling financially or falling behind on debts, please don’t hesitate to get in touch with our experienced team at My Liquidation for confidential advice.