Need business financing?
“Get a loan!” say the banks, credit unions, and more than likely, your friends and family members. But is the long, invasive application process, and reluctant lending of traditional financial institutions really the only way to realize your vision of growing a small business into a big one?
Here at The Commercial Finance Group in Atlanta, we’d like to inform you that banks aren’t your only option. In fact, unless you meet their very specific standards for credit history and collateral, you may be considered “unbankable,” and denied a traditional loan before you even get your name down on the application.
We believe that no one should have to give up on their dream simply because they don’t meet outdated standards for bankability. That’s why we offer a variety of alternative lending solutions, including several that fall under the category of off balance sheet financing. Keep reading to learn more about receivables financing and other off balance sheet financing options.
What Is Off Balance Sheet Financing?
A company’s balance sheet is where a record of all debts and liabilities are kept, in addition to revenue and assets. Most people expect that the truth about a business’s financial health will be made plain in the balance sheet, but that’s only because they don’t realize that not all debts are required to be listed there.
Unlike many financial terms, off balance sheet financing has an almost literal meaning. Off-balance sheet financing refers to financial liabilities (debts) that a company does not include on its balance sheet. If that sends up a red flag in your mind, please know that off balance sheet financing (OBS) is a legitimate, completely acceptable accounting method recognized by Generally Accepted Accounting Principles, or GAAP, as long as GAAP classification methods are followed. If you’ve heard the term discussed negatively in the past, it’s almost a guarantee that GAAP was not being followed correctly.
Examples Of Off Balance Sheet Financing
So what does off balance sheet financing look like in the real world? Here are a few of the most common examples:
- Operating Leases – There are instances in which a lease may be classified as an “operating lease” so that a company may utilize the leased asset under contract without reporting the asset or its associated liability.
- Take-Or-Pay Contracts – Under these agreements, both buyer and seller agree that some payment will be made, even if the product or service isn’t rendered. These agreements are most common in the chemical, paper, metal, and natural gas industries, as it’s sometimes possible that a company will contract with a firm to produce raw goods that they later decide they don’t want to purchase.
- Throughput Arrangements – Again most popular in the oil and natural gas industries, these arrangements are made between production companies and the owners of their pipelines or processing facilities. They are essentially the same as take-or-pay contracts.
- Commodity-Linked Bonds – Another type of off balance sheet financing that’s popular in the natural resource industry, this arrangement allows companies to “finance inventory purchases through commodity-indexed debt where interest and/or principal repayments are a function of the price of the underlying commodity,” explains Investopedia.
- Receivables Financing – Finally, we come to one of the off balance sheet financing options that is available to all types of companies, receivables financing. In this arrangement, unpaid invoices are sold to a factoring company like The Commercial Finance Group so that a business may immediately reduce its debt and the appearance of liabilities on its balance sheet.
Take Advantage Of Receivables Financing With The Commercial Finance Group
If you’re interested in learning more about how off balance sheet financing can assist your business with its plans for growth, please don’t hesitate to contact us. We’d be happy to walk you through our unique menu of customized lending solutions, including receivables financing, to find an option that works.
