John Glen, 46, said he met Coats at the shopping centre in Broomhill, Glasgow, on April 26, 2011 to discuss money owed to Coats by Miss Spence, a financial adviser.
The court heard that Miss Spence, who disappeared on April 14, 2011, also owed Mr Glen £180,000 and had paid him back more than £50,000.
Mr Glen, whose evidence was given from behind screens, said Coats claimed the money she had repaid was his money and he wanted it back.
He told Solicitor General Lesley Thomson, QC, prosecuting, that, as they walked along, Coats pointed towards a nearby playground and asked him to follow him, saying he had something to show him.
Mr Glen said: "I got a bad feeling about it and said, 'Whatever you want to show me, show me it here.'
"Colin went into the back of his trousers and pulled out a polythene bag. It was an Asda bag.
"He rolled the bag back and gestured towards me. When I looked in, there was a thumb in the bag. I didn't say anything. I was horrified by what I had seen."
Mr Glen was asked how long this incident took and replied: "No more than five or 10 seconds. It's not something you want to focus on."
Mr Glen told the jury Coats then folded up the thumb back in the bag and said he needed a cup of tea and asked if Mr Glen would buy him one.
He said they went into a nearby cafe and Coats went to the toilet and added: "I was wondering if he was flushing the thumb away."
Mr Glen claimed Coats came back to the table, produced an A4-size book and said he didn't believe Mr Glen had received only about £50,000 from Miss Spence.
He added: "Colin Coats said: 'I've gone over it twice and people that are having their thumbs cut off, don't tell lies.'
"He then said: 'I want my money and I want it first and if I don't get it I'm going to kill you."
In evidence, Mr Glen claimed he was forced to strip naked at Coats' house in Broomhill Path, Glasgow, during a visit on August 15, 2011.
Mr Glen said this was because Coats was worried he was wearing a wire. He said he was eventually allowed to put his clothes back on after he had agreed with Coats the amount of money he owed him was £196,000.
He said he went to the police the next day and told them all he knew.
A week or two weeks later he received an email for Coats which read: "You seem to have vanished. I will get someone to call your mum and dad, sister or brother just to ensure your land deal is still on track. Thumbs up.
"I hope you've not done a fatty. lol."
Mr Glen stated: "The thumbs up related to him cutting off Lynda Spence's thumb and fatty was also a reference to her."
The trial continues.
