We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Accounting

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is off Balance Sheet Financing?

Jim B.
By
Updated: May 16, 2024

Off balance sheet financing occurs when a company partakes in some sort of financial obligation that does not show up on its balance sheet. The purpose of keeping such transactions off the balance sheet is to make a company seem financially strong and enticing to potentially investors. There are many ways that off balance sheet financing can be achieved, including through credit default swaps, subsidiary companies, and operating leases. This practice can be controversial and has been at the heart of several financial collapses, most notably in the Enron financial scandal in the United States.

Companies can go to great lengths to make themselves seem profitable to investors, and they often do this by boasting of positive balance sheets. A balance sheet is a financial document that lists all of a company's assets and liabilities, and it is used to show how much these assets are worth compared to the debt being incurred. Any company that successfully eliminates any liabilities or debt from its financial reporting while still actually taking on those negative numbers is practicing off balance sheet financing.

It is important to understand that not all off balance sheet financing is nefarious or illegal. For example, a company that uses operating leases is actually practicing a form of it. While the leased asset still technically shows up on the balance sheet of the entity that actually holds ownership of it, the company that is leasing it still has use of it. That company can also write off the money paid to lease the asset as an expense on its tax report.

On the other hand, off balance sheet financing can also be problematic when practiced by large financial institutions that are crucial to the overall economic health of an economy. Banks often issue loans to customers and then sell off the loans to investors as securities. The bank can boast of the profits of these so-called credit default swaps, but it is also still subject to the risk of the customer defaulting. This risk doesn't appear on the bank's balance sheet but can become a real problem if multiple defaults occur.

Perhaps the notorious example of off balance sheet financing occurred in the United States with the Enron financial scandal that unfolded in 2001. Enron was a fast-rising energy company located in the state of Texas in the US, and its leaders were able to use subsidiary companies and partnerships to hide assets that were either overvalued or simply imaginary. Through questionable accounting, the company kept its own financial records looking spotless while it was actually tumbling towards bankruptcy. The resulting scandal led to closer inspection of the balance sheet accounting of large companies.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
Share
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.