Guide to Off-Balance-Sheet Financing
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What Is Off-Balance-Sheet Financing?
How Does Off-Balance-Sheet Financing Work?
Off-Balance Sheet Item Examples
Off-Balance-Sheet Financing Methods
Operating lease With this arrangement, a company rents or leases a piece of equipment instead of buying it outright. At the end of the lease period, the company then purchases that equipment at a low price. This strategy allows a business to only record lease payments as an operating expense on the income statement instead of listing the asset and liability on its balance sheet. Leaseback agreement With a leaseback, a company can sell an asset to another company (usually one it has a financial connection to) and lease it back as needed. This allows them to use the asset yet keep it off its balance sheet. Accounts receivables Companies that have unpaid invoices, can sell them to another company (called a factor company) at a discounted value. This allows the company to avoid recording a large (and possibly uncollectible) asset on its balance sheet. The factor company takes over the responsibility (and risk) of collecting payments from the customers. When the factor company receives payments, they give it to the original company, minus their fee. Partnerships Creating a partnership is another way to improve a company’s balance sheet. By doing this, the business doesn’t have to show the partner company’s liabilities on its balance sheet, even if it has a controlling interest in the company. Special purpose vehicles (SPVs) Large companies may create a subsidiary, called an SPV, to reduce their financial risk. Because the SPV has its own balance sheet, the company can move assets or liabilities onto the SPV’s balance sheet. The SPV may also have a higher credit rating, allowing the company to get financing with better rates and terms.
Pros and Cons of Off-Balance-Sheet Financing
Reporting Requirements for Off-Balance-Sheet Financing
Is Off-Balance-Sheet Financing Legal?
Enron's Notorious Off-Balance-Sheet Financing Practices
Can You Tell if a Business Is Using Off-Balance-Sheet Financing?
3 Small Business Loan Tips
Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
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