Off Balance Sheet Financing (OBSF) is a financial strategy used by businesses to acquire assets or fund operations without showing the associated liabilities on their balance sheet. One of the most common methods of off balance sheet financing is leasing, especially operating leases. This technique allows companies to access necessary equipment, property, or other assets without increasing their recorded debt or ownership obligations, which can improve financial ratios and make the company appear less leveraged.
Off balance sheet financing refers to the practice of keeping certain assets and liabilities off a company’s official balance sheet. These arrangements are not considered direct obligations of the company under traditional accounting rules, although the company still uses the assets and benefits from them. This method is typically used to keep debt-to-equity ratios low, which may help in obtaining more favorable loan terms or attracting investors.
Leasing, especially operating leasing, is the most common form of off balance sheet financing. Under an operating lease, a company rents an asset for a certain period but does not record the asset or the corresponding liability on its balance sheet. Instead, lease payments are treated as operating expenses in the income statement.
For example, a business might lease machinery or office equipment instead of purchasing it outright. The company gains the use of the asset without the burden of recording a large debt or depreciating the asset over time. This makes the company’s balance sheet appear stronger and more agile.
