Solvency vs Liquidity: Don't Confuse Them
Solvency and liquidity are two distinct but complementary concepts in financial analysis. Solvency measures a company's ability to pay all its long-term debts. Liquidity measures its ability to pay short-term obligations with liquid assets.
Key Takeaway
A construction SME can have excellent solvency (solid balance sheet) but poor liquidity (immediate cash need from delayed client payment). Conversely, a company with good immediate liquidity but massive long-term debt is solvent short-term but structurally fragile.
In B2B credit scoring, we analyze both: solvency to assess default risk, liquidity to identify short-term cash fragilities.
The 5 Solvency Ratios to Calculate
Here are the 5 fundamental ratios used by credit analysts to assess solvency:
| Ratio | Formula | Alert Threshold |
|---|---|---|
| Financial Autonomy | Equity / Total Liabilities | < 20% |
| Repayment Capacity | Debt / Annual Net Income | > 5 years |
| Current Ratio | Current Assets / Current Liabilities | < 1 |
| Gearing (Leverage) | Financial Debt / Equity | > 2 |
| Interest Coverage | EBIT / Interest Expense | < 2 |
Note: These ratios are based on annual balance sheets — they have 12-18 months lag on SMEs.
Why Ratios Aren't Enough for SMEs
Traditional ratios capture a frozen snapshot of the company once a year. On SMEs, this is insufficient because fragilities materialize in months. You must analyze early weak signals:
① Rising supplier payment delays — Jump from 30d normal to 60-90d = cash flow pressure
② Director rotation (public records) — Unexpected management change = organizational fragility
③ Degraded digital presence — Website down, inactive socials = retrenchment/cash shortage
④ Early legal signals — Liens, minor incidents = bigger problems ahead
⑤ Sector/macro misalignment — Outperformance then decline = structural fragility
Bank Statements: The Data Source That Changes Everything
Recent bank statements, sent as PDFs by the company (or through an open banking connection with some providers), show its cash flows, balances and incidents. This recent data reveals:
- •Actual payment delays (not those declared on balance sheets)
- •Even minor payment incidents (check rejections, overdrafts)
- •Abnormal cash volatility (unusual seasonal peaks/troughs)
- •Hidden debt signals (undisclosed supplier credit)
Regulation: the AI Act
The AI Act classifies creditworthiness assessment of natural persons, including sole traders, as high-risk, with obligations applying from 2 December 2027. For every analysis, bank statements provide objective, verifiable data that helps justify each decision.
4-Step Method: Analyzing Solvency
Step 1 — Structural Data
Registration, legal form, age, industry code, management team
Step 2 — Balance Sheet Ratios
Calculate the 5 solvency ratios across the last 3 annual reports
Step 3 — Behavioral Signals
Banking flows, payment delays, legal incidents, digital presence
Step 4 — Decision & Credit Limit
APPROVED / REVIEW / DECLINED + credit limit amount
Want to see how RocketFin applies these 4 steps on your real files?
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Comparison of solvency analysis solutions:
| Tool | Type | Speed | SME-Friendly |
|---|---|---|---|
| Infogreffe | Public data | 1-2 days | Basic |
| Coface | Generic scoring | Variable | Moderate (expensive) |
| Creditsafe | B2B scoring | Variable | Moderate |
| RocketFin | Native API · Explainable PDF report | 60 s | Excellent |
Note: This table is objective. RocketFin is the tool of the editor of this page — please consider this in your evaluation.
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