A creditor is a person or entity that is owed money by another person or entity, known as a debtor. A creditor may be a bank or financial institution that has provided a loan, a supplier who has delivered goods or services without payment, or any other party that is owed money.

Creditors have legal rights to recover the money that they are owed, which may include taking legal action against the debtor, negotiating repayment terms, or even commencing bankruptcy (individual) or wind up (company) proceedings.

A creditor can be secured or unsecured. A secured creditor is a creditor whose loan is secured over property of the debtor which is given as collateral to the creditor. That means that the secured creditor has a ‘security interest’ over some or all of the company’s assets to ensure their debt is repaid should the debtor default on the loan.

An unsecured creditor is a creditor that has no security or collateral to back up the debt, and therefore the creditor has no rights to specific assets or property of the debtor upon default. In the event of bankruptcy or a corporate external administration, unsecured creditors are typically lower on the list of creditors to be paid and may only receive a portion of the debt owed, if any at all, after all, secured creditors are paid back in full.

Recommended reading: