In 100 Words | Why do Corporates engage in Off-Balance-Sheet financing (OBSF)?

IN 100 WORDS

Off-balance-sheet financing allows companies to strategically manage their financial reporting and maintain a healthier balance sheet, thereby enhancing their financial standing and creditworthiness. Usually, this is done to keep the balance sheet healthy and to ensure that the financial covenants like debt-to-equity ratios and leverage ratios are low.

This practice allows corporates to maintain a less leveraged balance sheet thus allowing them a higher capability to borrow. Also, healthier financial ratios means healthier credit rating which directly impacts the company’s cost of borrowing and liquidity position.

Tip: Balance Sheet less leveraged, healthier rating.