When you were first taking business management classes in college, or going through a first-time small business owner’s course at your local community center, you probably heard a lot of good advice about your balance sheet. Most people are taught that a company’s balance sheet should provide an accurate snapshot of its financial condition at any moment in time. This is why it’s so important to track both revenue and expenses meticulously, making it possible to know exactly where you stand with debts and debts owed at all times.
When you employ off-balance sheet financing methods like account receivables financing, it can feel a little uncomfortable; as if you’re doing something unethical. Keep reading as we explore the reason that off-balance sheet financing was created, why it gets a bad rap in the small business community, and how to employ appropriate, 100-percent-above-the-table techniques to grow your business.
Why Off-Balance Sheet Financing Was Created
Accountants and financial experts are always looking for ways to save their companies money. This is just good business and they wouldn’t be doing their jobs if they didn’t look for these opportunities. Off-balance sheet financing is one of these creative workarounds, a way to keep debt to equity and leverage ratios low, especially when putting certain expenditures on sheet would cause problems with existing debt covenants. As with many aspects of running a business, there are both ethical and unethical ways to employ this accounting practice, and it’s the companies that have employed the unethical techniques that are to blame for its bad reputation.
Why Off-Balance Sheet Financing Gets A Bad Rap
Because entrepreneurs are trained to report every single transaction on their balance sheets, the very nature of off-balance sheet financing feels fraudulent to them. Well-known scandals like what occurred during the Enron bankruptcy didn’t help things. This was, of course, a prime example of energy traders using inappropriate off-balance sheet techniques.
It’s important for all business owners to realize that off-balance sheet financing is included in and governed by the U.S Generally Accepted Accounting Principles (GAAP) Rules. These guidelines help companies determine when things can be capitalized or expensed. As long as you’re following these rules, you have nothing to fear from receivables financing or any of the other off-balance sheet techniques described below.
Appropriate Off-Balance Sheet Financing Techniques For Any Business
- Leases*
- Joint Ventures & Finance Subsidiaries
- Take-Or-Pay and/or Through-Put Contracts
- Redeemable Preferred Shares
- Account Receivables Financing
*We’ll talk more about leases and off-balance sheet financing in a future blog post, as this most-common technique underwent some regulation changes in 2016.
Take Advantage Of Receivables Financing For Your Business!
We hope this article has helped you to see that off-balance sheet financing is often unworthy of its negative reputation in the business world. The truth is that scores of businesses utilize this accounting practice to help them minimize on-sheet debt and honor their existing loan covenants while still accessing the additional working capital they need to achieve their long-term goals. If you’d like more information about account receivables financing or any of our other custom lending solutions, please contact us today.