What Is a Trade Creditor: Definition
What types of products or services does your business offer your customers? Where do you get your products or services? Do you work with a manufacturer or wholesaler?
Depending on the type of products or services that you offer, you might purchase them from someone else. Or, another business could potentially purchase their products directly from you. A trade creditor is a business that owes money to another business.
Here is everything that you need to know about a trade creditor, how it works and how it’s different compared to other creditors.
Here’s What We’ll Cover:
What Is a Trade Creditor?
Simply put, a trade creditor is when a business or entity owes money to another business. So, if you have a supplier or critical vendor that you purchased your goods from and you haven’t paid them yet, they are known as a trade creditor. And it can work in the opposite way.
The amount that ends up going on your balance sheet for trade creditors becomes the sum of unpaid invoices from suppliers. For example, let’s say a solicitor sends you a bill for £300 on 1 March, and a cleaning company sends you a bill for £200 on 5 March. If you pay both of those bills on the 1st of April, your business’s trade creditors figure would be £500 on 31 March.
Trade creditors figures are always going to show inclusive of VAT since it’s the amount you need to pay to your suppliers.
Why Do Trade Creditors Matter?
It’s important to know exactly how much money you owe to a supplier. Here are some of the biggest reasons why trade creditors matter.
- You can stay on top of all your payments to all your suppliers
- You can have a clear picture of exactly how much cash is yours
- You can take advantage of different payment terms to help maximize working capital
- You can pay suppliers quickly and efficiently which will help keep a positive business relationship
It can also be important to have a solid strategy or plan in place to keep track of who you owe. It’s going to depend on the size of your business and how many suppliers you work with. But there are some things that you can do to help stay organized.
Some businesses use a simple spreadsheet to keep track of all the information. This can work, but it can also become time-consuming and tedious to keep it updated and accurate. The requirements of Making Tax Digital has several businesses choosing automated accounting software.
What’s the Difference Between Trade Creditors and Accruals?
Basically, an accrual is a type of provision for an expense that has been incurred but hasn’t been invoiced. For example, your financial year-end is 31 December and you receive an invoice from a supplier for £500. You know that you have a consultant that’s going to bill you for £1000, but they haven’t sent it yet.
Your trade creditors will be £500 for the invoice that you have already received. However, accruals will be £1000 since the consultant hasn’t sent you an invoice, even though you still owe them money.
What’s the Difference Between Trade Creditors and Other Creditors?
There is a range of different creditors that are out there and they’re used for different reasons. To keep things simple, a creditor is basically anyone you owe money to. Other creditors can include things like tax liabilities, overdrafts and loans or accruals.
What About Secured and Unsecured Creditors?
When it comes to business insolvency, two terms can commonly get used: secured and unsecured creditors. Usually, these only impact business operations if you’re dealing with a business that files for bankruptcy. But if this is the case, you could get classified as either an unsecured or secured creditor.
- Secured creditor. This is when your credit gets tied to a security or asset that’s held by the debtor. There is usually an agreement in the contract that outlines if debts aren’t paid, assets can get seized and sold to recoup losses.
- Unsecured creditor. This is basically the complete opposite of a secured creditor. There are no rights to seize assets if debts don’t get paid. This means trying to receive that money might have to come from another source, such as through a debt collection service.
When it comes to trade creditors in the UK, it’s also worth noting that you must include VAT. This is due to the fact that your supplier is VAT registered, so your debt becomes the VAT-inclusive amount.
As a small business owner, you are likely going to come across different creditors throughout your time in operation. It can sometimes be confusing, but knowing the differences can have a positive impact on your business.
A trade creditor is a business that owes money to another business. Let’s say you purchased something from a supplier but haven’t paid for it yet. That would be a trade creditor situation.
Having a good strategy or plan in place to handle trade creditor situations can be a great business decision. Your strategy will depend if you’re a small or large business, but it can help you stay organized and on top of your accounting processes.
Plus, staying on top of creditors can help with accounts payable and accounts receivable. It can help limit any bad debts from unsecured trade creditors. And, it doesn't matter if you're a public company, what your capital structure is or if you have extensive experience.
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