What it is:
How it works (Example):
If you borrow money from XYZ Bank, XYZ Bank becomes your lender. Lenders are creditors, but not all creditors are lenders. For example, utility companies, health clubs, phone companies and issuers can all be creditors if you have contracts with them or if they have performed services for which you have not yet paid.
Some lenders are more senior than others. For example, if Company XYZ issues bonds, the bondholders are essentially lenders who are senior to Company XYZ's shareholders. This means that should Company XYZ go bankrupt, the bondholders are entitled to repayment before the shareholders are.
In many cases, companies have several different types of debt, and some of these lenders may be subordinate to others. Some lenders may even be unsecured, meaning that the company has not pledged any collateral.
Why it Matters:
Lenders may sue to obtain access to accounts or other assets if the borrower has not paid. Lenders may also place liens on the borrower's assets, meaning that the borrower cannot sell the assets without paying the lender first. In addition, lenders could report the problem to a credit bureau, which may place the item on the borrower's credit report.