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OFF-BALANCE SHEET FINANCING Definition
- OFF-BALANCE SHEET FINANCING
OFF-BALANCE SHEET FINANCING a. is a form of borrowing in which the obligation is not recorded on the borrower's financial statements. Off-balance sheet financing can employ several different techniques, which include development arrangements, leasing, product financing arrangements or recourse sales of receivables. Off-balance sheet financing will raise concerns regarding the lenders' overall risk, but it improves their debt to equity ratio, which enhances their borrowing capacity. As a result, loans are often easy to arrange and are given lower interest rates because of the improved debt structure on the balance sheet. Off-balance sheet financing is a technique often used by multinational businesses in order to secure additional loans on the worldwide loan market; and, b. is a method of obtaining funds through a long-term non-cancelable lease that is accounted for as an operating lease. The lease does not meet the criteria of a capital lease. This being the case, the present value of the lease obligation in not included in the lessees balance sheet.
