| Off Balance Sheet Financing involves raising money in | | | | company. The third party purchases property in its |
| a way that it does not appear on the financial | | | | name and leases it out to the company. The |
| statement as loan or cash flow. Some of the most | | | | company is considered a tenant or debtor of the |
| widely used ways to achieve that is to go by joint | | | | third party. |
| ventures, leases and R&D partnerships. The | | | | Disadvantages of Off Balance Sheet Financing; |
| lesser-used methods are trade receivables | | | | Off Balance Sheet Financing have some |
| securitization and passing tax benefits to investors. | | | | disadvantages that relate to the company's ability to |
| Techniques for Off Balance Sheet Financing; | | | | function independently. |
| Off Balance Sheet Financing uses the following | | | | 1) If your company forms a partnership with another |
| techniques: | | | | party that can provide funds, it means that you have |
| 1) The company forms a joint venture with a partner | | | | to part with technical know how. |
| company. One party provides the technical know | | | | 2) You may have to pass on tax benefits to |
| how while the other provides the funding. The smart | | | | investors. This can eat into your cash flow. |
| way to structure Off Balance Sheet Financing is to | | | | 3) Trade receivables securitization is not possible |
| obtain royalties from the proceeds of the venture. | | | | unless your company has a steady cash flow. |
| 2) The company can lease equipment or other | | | | 4) The Off Balance Sheet Financing Techniques have |
| facilities for its operations; rather than buying them. | | | | a potential for misuse, as the Enron case proved. |
| The lease equipment is not considered company | | | | According to critics, Off Balance Sheet Financing is a |
| asset, and it can save your business from having to | | | | method of artificially raising return on assets and debt |
| buy equipment. | | | | to capital ratios. |
| 3) You can pass off some tax benefit to an investor | | | | For all its disadvantages, sometimes Off Balance |
| in order to keep the funding off your balance sheets. | | | | Sheet Financing is the only hope for companies that |
| 4) Trade receivables securitization is another | | | | need to raise funds and do not have many options. If |
| technique of Off Balance Sheet Financing. The Special | | | | you need to know more about Off Balance Sheet |
| Purpose Entity created by the company purchases | | | | Financing techniques, you can consult a financial |
| receivable from Originator and offer securities to | | | | advisor or small business consultant who will guide |
| investors. | | | | you with the intricacies of this valuable method of |
| 5) A third party provides synthetic Leases to the | | | | raising funds. |