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What Does it Mean to Be "Financially Solvent"?

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  • Written By: Laura M. Sands
  • Edited By: Heather Bailey
  • Last Modified Date: 03 April 2014
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Being financially solvent means being able to pay all financial obligations in a timely manner and still have liquid spending capital left over. Individuals in this state are not burdened by financial debt and generally have a good credit rating. The state of being solvent applies to businesses and individuals who are able to meet all debts in a timely fashion without having to deplete cash reserves in the process.

Sometimes referred to being in the black or in the pink, being financially solvent generally represents a certain level of financial freedom. Individuals and businesses operating in this state have sound control over their finances, which translates into greater credibility when doing business with others. Able to meet all financial obligations while still having money left over is a state that most people aspire to regardless of career or current economic status.

Individuals who are financially insolvent, on the other hand, are those who have great difficulty paying debts on time. In addition to feeling a financial strain as the result of being insolvent, people and businesses in this predicament often experience poor credit reputations with others. Often, this translates into the inability to obtain future credit or being charged a higher interest rate when credit is extended, particularly in comparison to the rates offered to those who are financially solvent. It is not unusual for those who are not solvent to have a greater need for government assistance, file bankruptcy or seek financial bailouts through other methods and sources.

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To be solvent generally means an ability to enjoy levels of financial freedom that are not available to insolvent businesses and individuals. In addition to meeting financial obligations, such as paying bills and paying employees on time, financially solvent individuals and businesses are able to save or invest additional monies in ideas and activities at will. Doing so often results in personal growth and business expansion.

While being financially solvent means the ability to pay debts on time, an important aspect of this state is the ability to have money left over after doing so. Many people work hard to regularly meet financial obligations on time, but find it difficult to budget finances in such a way so as to have discretionary cash left over after all bills are paid. Being able to practice one aspect of solvency without the other does not qualify one as being completely financially solvent.

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comfyshoes
Post 2

@Latte31 - I wanted to add that I worked for a company that was very financially solvent. They had a lot of cash on hand and were really careful with their spending. They did not waste resources and ran a tight ship. They were very profitable.

I think that this is similar to a family that sticks to s personal budget. I think that people that are careful with their spending and control impulse purchases and plan what they will spend their money on would also yield the same results. I like to listen to a financial show on the radio in which people call in and many are debt free. They have paid off all of their major bills and some have even paid off their mortgage.

These people are thrilled because now that they have no major bills and they can take control over their lives and maybe consider changing a job that they disliked because now they are financially solvent and that provides a person with a lot more choices in life.

Having a lot of bills really makes a person feel trapped.

latte31
Post 1

I think that a lot of businesses suffer from financial insolvency because of some technological advances have that have made their business model obsolete.

I have seen a lot of book stores and record stores go out of business because people are increasingly downloading books on electronic readers and downloading music on MP3 players. I think it is sort of sad because I love going into bookstores and hate to see so many shut down, but I do have to admit that I am guilty of downloading books on to my tablet so that I can take my books with me.

I also see the same thing happening with video stores. A lot of them are going out of business and becoming financially insolvent because people are going to the DVD kiosks in supermarkets that only charge a dollar for the rental or they subscribe to an online service that sends them a series of movies for a fixed monthly price. Businesses have to adjust their business model to remain competitive or risk becoming financially insolvent.

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