What is an Unsecured Creditor?

An unsecured creditor is an entity that has extended credit to another party without first obtaining a collateral agreement. This means that the creditor has no claim on the other party’s assets if it does not pay the amount owed; this is known as an unsecured claim.

If the debtor is subsequently unable to pay, then the unsecured creditor will not be eligible for reimbursement until the claims of all secured creditors have been settled. At that time, the unsecured creditor will be paid on a pro rata basis along with all other creditors in the same classification. This will likely result in a partial payment or no payment at all. Creditors typically take on this increased level of nonpayment risk because of competitive pressure to offer the same terms to customers that their competitors are offering.

Examples of Unsecured Creditors

Here are several examples of unsecured creditors:

Trade creditors. Businesses that provide goods or services on credit without requiring payment upfront. For example, a supplier delivers raw materials to a manufacturer with payment terms of 30 days.
Employees. Employees owed wages, salaries, or other benefits like bonuses or vacation pay are unsecured creditors if the company cannot pay. For example, a business that goes bankrupt before paying its employees for the last pay period.
Landlords. Property owners leasing space to a business become unsecured creditors if rent payments are overdue and unpaid. An example is a retail store defaulting on its lease agreement.
Financial institutions. Loans provided without collateral, such as some business lines of credit or credit cards. An example is a bank issuing an unsecured business loan to a company without any assets pledged as security.
Utility providers. Companies providing essential services like electricity, water, internet, or phone services. An example is a business owing unpaid utility bills to its electricity provider.
Service providers. Businesses or individuals providing professional services, such as consultants, lawyers, or IT support, who extend credit terms. An example is a law firm awaiting payment for legal services rendered.
Business partners. Joint venture partners or affiliates owed payments under agreements without collateral. An example is a franchisee that fails to pay agreed-upon fees to the franchisor.
Credit card issuers. Credit card companies that extend credit to a business for purchases made without collateral backing. An example is a company that uses a corporate credit card and fails to make payments on it.