What is the difference between investors and creditors? Both of them may help and support a business or entity by contributing additional money or assets to the business. An investor contributes asset in a form of capital or equity, while a creditor contributes asset in the form of debt or liability. However, these two are different from each other. The following are the differences of an investor and a creditor:
1. An investor earns investment income or dividend, while a creditor earns interest income and other credit charges.
2. An investor invests money to an investee in order to make profit through profit sharing (investment income or dividend), while a creditor lends money to a debtor in order to make profit through interest income and other credit fees on the loan.
3. An investor contributes asset to a business which increases its capital or equity, while a creditor contributes asset to a business which increases its debt or liability.
4. An investor usually becomes an owner or partly owner in the business he or she invested, while a creditor doesn’t become a co-owner in the business which he or she has extended a loan.
5. An investor faces higher risk but may earn higher reward (investment income or dividend), while a creditor faces lower risk but earns fixed or limited reward (interest income).
6. An investor suffers losses when the investee or the business he or she has invested incurs losses, while a creditor is not necessarily affected by the losses of the debtor or business he or she has extended a loan.
7. An investor may incur investment losses based on his or her profit or loss sharing, while a creditor may incur a loss in the form of bad debt expense or deemed uncollectible receivables.
8. An investor may start an investing or holding company, while a creditor may start a lending company.