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There are only so many businesses that last for decades. The rest will close, merge, be bought, or become insolvent and close. It’s natural selection applied to the business marketplace. The bad news is the business goes away. Our friends at Focus Law LA will tell you that the good news is that if their market and customer base are strong enough, another stronger, better company will take their place.

What Is Solvency?

Solvency is a company’s ability to meet its long-term financial obligations. A business is considered solvent when its assets exceed its current liabilities, expressed as a ratio. If it’s greater than 1:1, the company is considered solvent. It can achieve long-term growth while meeting its obligations.

Liquidity measures a company’s ability to pay short-term debts with assets it currently owns. Liquidity also measures how quickly a company can convert assets to cash. They might be solvent long-term but have low liquidity to meet immediate needs, or vice versa. Ideally, a company should be both liquid enough and solvent.

Solvency is assessed by its cash flow statement and balance sheet:

  • Balance sheet: This summarizes a company’s liabilities and assets. A solvent company’s realizable assets are greater than its liabilities. An insolvent company’s liabilities are more than its realizable value
  • Cash flow statement: This focuses on the company’s ability to pay its short-term demands and obligations. It analyzes the ability to settle debts when they’re due and having readily available resources to pay the obligations

The cash flow also offers insight into the company’s history of paying debt, including:

  • How much debt is outstanding 
  • If regular payments reduce debt liability
  • The company’s ability to meet debts coming up soon

A solvency analysis could find past financial losses, the inability to raise funding, poor company management, or the failure to pay fees and taxes.

What Is Insolvency?

This is the opposite of solvency. It involves stopping debt payments as they become due in the ordinary course of business instead of a particular debt that may be in dispute.

What Is Delinquency?

Your loan or credit account will be delinquent if you miss a payment. It may go into default if you skip several and the debt is not made current. The exact definition varies with the circumstances and contract language. Both types of accounts are past due. 

Default usually signifies that the account’s terms are not being met, and a lender or creditor decides the debt won’t be paid. They will likely send the debt to collection if you can’t work out a repayment. 

How Can I Address Insolvency And Delinquency?

Your business could:

  • Cut costs as much as possible while maintaining as much of your business as you can so you won’t lose sales
  • Collect from those who owe you money and get what you can. Offering a discount if they pay by a specific date may obtain a faster response
  • Explore getting loans and payment plans with those you owe money to

If these suggestions aren’t realistic, you could discuss your potential bankruptcy options with a business partnership lawyer.