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.
In a nutshell:
- Debtors are individuals or businesses that owe money, whether to banks or other individuals.
- Debtors are often called borrowers if the money owed is to a bank or financial institution, however, they are called issuers if the debt is in the form of securities.
- Debtors cannot go to jail for not paying consumer debt (e.g. credit cards).
- The Fair Debt Collection Practices Act (FDCPA) prevents bill collectors from threatening debtors with jail time, but courts can send debtors to jail for unpaid taxes or child support.
- Creditors may have other recourse if there’s collateral, such as repossession, or they can take debtors to court for garnishments.