2 min read
Definition
Solvency is whether a business's total assets exceed its total liabilities — whether it could, in principle, pay everyone it owes. It is a longer-term measure than liquidity, which asks only about the immediate term.
In plain terms
A business is solvent if, on the whole, it is worth more than it owes. It can be solvent yet illiquid (worth a lot but short of ready cash) or, dangerously, insolvent despite holding cash if its debts outweigh everything it owns.
Why it matters
Solvency is a legal test with serious consequences for directors: trading while insolvent carries personal liability. See insolvency and liquidity.
Related reading
Liquidity
Liquidity is how easily a business can meet its short-term obligations — how much cash and near-cash it has…
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Illiquid describes an asset that cannot easily or quickly be turned into cash without losing value —…
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Cash reserve
A cash reserve is money you keep aside on purpose — the buffer that lets a business absorb a bad month…
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Solvency and insolvency
Solvency means a company can pay its debts and its assets exceed liabilities; insolvency is the opposite —…
Read →Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.