Solvency

The distinction between solvency and liquidity is fundamental to financial health, particularly for high-growth, capital-intensive sectors like PayFi (Payment Finance) and embedded finance. Liquidity is a short-term measure, focusing on a company's ability to meet its immediate, near-term financial obligations, typically those due within one year, by converting assets into cash quickly and efficiently. Common liquidity metrics include the Current Ratio (Current Assets / Current Liabilities) and the Quick Ratio (or Acid-Test Ratio). For example, a PayFi company with a Current Ratio of 2.5:1 means it has $2.50 in short-term assets for every $1.00 in short-term debt, indicating strong liquidity to cover daily operational costs, such as processing fees, payroll, and short-term vendor payments. In contrast, solvency is a long-term measure of a company's financial viability, assessing its capacity to meet all its long-term debts and financial commitments over an extended period, ensuring the business can continue operating indefinitely. Solvency is less about the immediate availability of cash and more about the overall structure of the balance sheet, specifically the relationship between total assets and total liabilities.