Solvency refers to the financial health of an individual or business, usually regarding whether the party has more assets than debt. More often, the word is used in the negative, termed insolvent, to refer to a business that is worth less than its debts. There are many ways to analyze solvency. The most popular way is to look at whether the fair market price of all assets of the individual or business is worth more than the debt, in which case the party is solvent. Another way to analyze solvency is to look at whether the party has the cash flow to pay its debts in the future. A business that likely can do so would be categorized as solvent. Whether or not an individual or business is solvent or insolvent can alter the party’s taxes and the allocation of assets in bankruptcy. For more information on insolvency, click here.
[Last updated in July of 2021 by the Wex Definitions Team]