Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity.[1] Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth.[2][3] This is best measured using the net liquid balance (NLB) formula. In this formula, solvency is calculated by adding cash and cash equivalents to short-term investments, then subtracting notes payable.[4] There exist cryptographic schemes for both proofs of liabilities and assets, especially in the blockchain space.[5][6][7]
Importance
[edit]A lender must assess a borrower’s solvency before granting credit. Loan conditions, including the interest rate, depend on the perceived risk. A highly solvent borrower usually receives better terms.
Solvency of individuals
[edit]European Directive 2014/17/EU introduced a common framework for consumer and mortgage credit. Solvency assessment is now a clear legal requirement for lenders and intermediaries.
The analysis considers income, expenses, assets, and other financial factors. The independent valuation of the financed asset is also part of the process.[8]
Solvency of businesses
[edit]Solvency is often evaluated through the gross operating surplus shown in the income statement. This indicator, minus expected loan repayments, should remain well above zero. A high level increases the company’s ability to obtain favourable rates.[9]
The financial leverage ratio is another common measure.
Other borrowers and tools
[edit]For individuals, solvency models often use ratios and predictive scoring tools.
For businesses, lenders rely on financial statements and performance indicators.
See also
[edit]Notes
[edit]- ^ Zietlow & Seidner 2007, p. 5
- ^ Gaist 2009, p. 34
- ^ "Solvency Ratios vs. Liquidity Ratios: What's the Difference?". Investopedia. Retrieved 2025-11-17.
- ^ Zietlow & Seidner 2007, p. 30
- ^ Ji & Konstantinos 2021
- ^ Chalkias et al. 2020
- ^ Dagher et al. 2015
- ^ Tous, La Finance Pour (2025-06-19). "Solvabilité". La finance pour tous (in French). Retrieved 2025-11-17.
- ^ "Définition solvabilité | Infonet". infonet.fr (in French). Retrieved 2025-11-17.
References
[edit]- Gaist, Paul A (2009). Igniting the Power of Community: The Role of CBOs and NGOs in Global Public Health. Springer. ISBN 978-0-387-98156-7. OCLC 310400989.
- Zietlow, John T; Seidner, Alan G (2007). Cash & investment management for nonprofit organizations. John Wiley and Sons. ISBN 978-0-471-74165-7. OCLC 255472451.
- Ji, Yan; Konstantinos, Chalkias (2021). "Generalized Proof of Liabilities". Computer and Communications Security. ACM.
- Chalkias, Konstantinos; Lewi, Kevin; Mohassel, Payman; Nikolaenko, Valeria (2020). "Distributed Auditing Proofs of Liabilities". Zkproof.
- Dagher, Gaby G.; Bunz, Benedikt; Bonneau, Joseph; Clark, Jeremy; Boneh, Dan (2015). "Provisions: Privacy-preserving Proofs of Solvency for Bitcoin Exchanges". Computer and Communications Security. ACM.
External links
[edit]
The dictionary definition of solvency at Wiktionary
