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What is off balance sheet financing?
Does anyone know what this business term means? Came across it in some literature and I’m lost…
Off balance sheet finanicng is where a company gets funding, but structures the agreement in such a way that it does not recognise any liability regarding that funding on its balance sheet.
For example in a general situation a company migh sell its debtors to the bank to get financing,but they will also recognise some form of liability regarding that financing i.e costs that they have to pay if a percentage of the debtors forfeit etc.
In off balance sheet financing For example.
Company A creates a special purpose entity to which it is going to sell its debtors to get financing. This special purpose entity Obtains funding for example by issuing debentures to their shareholders and they recognise the liability in their books regarding the debentures that they have to pay back.
Why do companies do this? There are many reasons, being too highly geared (i.e. too much debt) may be a reason for this and if they have to much debt their current funders might not be happy etc.
Oh and please ask more of these types of questions, you are really helping me to revise my work for the test I am writing next week :P
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