Off balance sheet financing

Debt financing that is not shown on the face of the balance sheet is called “off balance sheet financing”.

Off balance sheet financing allows a company to borrow being without affecting calculations of measures of indebtedness such as gearing.

The motives may include misleading investors and remaining within the terms of debt covenants. It may also sometimes be a side effect of the method of raising capital chosen, but it is probably best to be suspicious of the motives for raising debt in a manner that is not visible to investors.

The scope for off balance sheet financing has reduced over the years as accounting standards have caught up with loopholes that allowed off balance sheet financing. In the past these have included leasing and borrowing through special purpose vehicles.

For the moment off-balance sheet financing does not seem to be much of a problem but it is likely that creative new ways to borrow off the balance sheet will be found and exploited.

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