Solvency is a business's ability to meet all of its long-term financial obligations, indicating whether its assets exceed its liabilities over the long run.
Solvency looks at the long-term picture: does the business own more than it owes, and can it service its debts over time? A solvent business has positive equity (assets exceed liabilities) and enough ongoing earnings to cover interest and principal. Insolvency, the reverse, can lead to restructuring or bankruptcy.
Solvency is measured with ratios like debt-to-equity and interest coverage, and it is distinct from liquidity, which is about short-term cash. Lenders assess both: liquidity to know you can pay this month, solvency to know the business is fundamentally sound.
A company with $500,000 in assets and $300,000 in liabilities is solvent, with $200,000 of positive equity. If liabilities grew to exceed assets, it would be technically insolvent even if it still had cash on hand.
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