Sequel to my earlier articles “Understanding Life Cycle Financing- What an entrepreneur should know”, “Financing Entrepreneurial Ventures—What an Entrepreneur needs to know”, “Understanding Debt Financing- What an Entrepreneur Should Know”. This article aims to explain the various terms and financial language used when thinking or choosing debt financing as an alternative form of financing of your business.

The terms include:

Solvency

Solvency refers to a firm’s ability to pay its debts. The firm is said to be solvent if its total assets are greater than its total liabilities. On the other hand, a firm whose total liabilities are more than total assets is said to be insolvent.

Overtrading

Overtrading refers to a situation where a business incurs short-term costs that it cannot meet while in pursuit of growth. In this case, current assets are less to cover current liabilities.

Bankruptcy

Bankruptcy occurs when there is reorganization or liquidation of a business that cannot pay its debts after a long legal process has been completed.