Solvency

Solvency describes whether a person or company has the financial ability to pay their outstanding debts and meet their obligations. The term is often used in connection with credit ratings, debt collection, and assessing the risk of non-payment.

What does solvency mean?

A solvent customer is a customer who has the financial capacity to pay their invoices on time. This is a question of income, balance between income and expenditure, liquidity, and general financial stability.

If a customer is unable to pay, the risk of the following increases:

• late payments
• payment difficulties
• defaulted debt
• potential losses incurred by the creditor

Therefore, the concept is central to both credit granting and debt collection processes.

How is solvency assessed?

The assessment may vary depending on whether the customer is a private individual or a business, but the following factors are typically taken into account:

For private individuals

• Income and fixed expenses
• Available funds
• Any loans or repayments
• Payment history
• Existing debt with other creditors

For businesses

• Liquidity and liquidity ratio
• Solidity and equity
• Earnings capacity (e.g., profit/loss)
• Debt ratio and financing structure
• Historical payments to suppliers
• Signs of financial challenges (e.g., decline in equity)

Low payment capacity is often a precursor to non-payment, payment agreements, or debt collection.

Solvency in debt collection and debtor management

When a case goes to debt collection, the debtor's ability to pay is assessed in order to find the best solution. This can, for example, have an impact on:

• whether the debtor can pay the entire amount
• whether a repayment plan should be agreed upon
• how strict the conditions can be
• whether a case should be sent for legal collection

A realistic assessment saves both time and money and increases the likelihood that the creditor will get their money.

Typical signs of low solvency

Some indicators are the same regardless of whether the customer is a private individual or a business:

• Repeated late payments
• Multiple loans or high debt ratio
• Low turnover or deficit
• Lack of response to reminders
• Frequent address changes
• Payment default notices

When several of these factors occur simultaneously, credit terms and payment monitoring should be tightened.

Why is solvency important for companies?

For suppliers, service providers, and lenders, solvency is a crucial factor in risk management. It helps to:

• set credit limits
• assess the need for a guarantee or prepayment
• reduce the risk of loss
• identify customers who require extra attention

A correct assessment is often the difference between a healthy customer relationship and a loss.