Solvency

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]

## Contents

* 1 Importance
* 2 Solvency of individuals
* 3 Solvency of businesses
* 4 Other borrowers and tools
* 5 See also
* 6 Notes
* 7 References
* 8 External links

## Importance

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

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

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

For individuals, solvency models often use ratios and predictive scoring tools.

For businesses, lenders rely on financial statements and performance indicators.

## See also

* Accounting liquidity
* Debt ratio
* Going concern
* Insolvency
* Quick ratio

## Notes

1. ↑ Zietlow & Seidner 2007, p. 5
2. ↑ Gaist 2009, p. 34
3. ↑ "Solvency Ratios vs. Liquidity Ratios: What’s the Difference?" (in en). https://www.investopedia.com/articles/investing/100313/financial-analysis-solvency-vs-liquidity-ratios.asp.
4. ↑ Zietlow & Seidner 2007, p. 30
5. ↑ Ji & Konstantinos 2021
6. ↑ Chalkias et al. 2020
7. ↑ Dagher et al. 2015
8. ↑ Tous, La Finance Pour (2025-06-19). "Solvabilité" (in fr). https://www.lafinancepourtous.com/decryptages/marches-financiers/fonctionnement-du-marche/solvabilite/.
9. ↑ "Définition solvabilité | Infonet" (in fr). https://infonet.fr/etude-de-solvabilite/comment-definit-on-la-solvabilite-dune-entreprise/.

## References

* 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

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