In a previous post, we introduced you to the world of off balance sheet financing (OBS) as an alternative to traditional bank loans. As we mentioned, not all small to mid-sized businesses are classified as “bankable” by traditional financial institutions, even though these are the very businesses that so often find themselves in a position that requires cash in order to grow.

Don’t Let A Lack Of Financing Options Kill Your Business

When you think about the lack of flexible financing options, it comes as no surprise that cash flow problems force many new businesses to close their doors in their first five years of operation. Here at The Commercial Finance Group in Atlanta, we’re dedicated to changing this trend. We believe that small to mid-sized businesses are the backbone of our economy, which is why we specialize in alternatives to traditional bank financing that help keep the doors open and the bills paid, all while building a “bridge to bankability” in the future.

Factoring and receivables financing, two types of off balance sheet financing, are some of our most popular lending solutions. Keep reading to learn more about why presents such an attractive option for young companies.

How Off Balance Sheet Financing Works

In case you haven’t yet had a chance to read our previous post discussing examples of off balance sheet financing, we’ll provide a brief refresher on the term’s definition. In certain situations, a business may obtain funds or equipment from external sources, but unlike a traditional loan or credit card debt, these transactions are omitted from their official balance sheet. This is a completely legal and accepted accounting practice, provided it’s carried out according to Generally Accepted Accounting Principles, or GAAP.

Reasons Off Balance Sheet Financing Is So Attractive

  • Low Risk – One of the main reasons that small businesses are attracted to off balance sheet financing options like factoring or receivables financing is that they’re neither assets or liabilities. Liabilities (debts) must eventually be paid back or result in a loss, which means that they’re a risk to the company. By turning liabilities (unpaid invoices) into cash, receivables financing reduces a company’s risk.
  • Increased Borrowing Capacity – Both businesses and individuals must be mindful of their debt burden, or the amount of debt they’re carrying in relation to their income. Just like a bank won’t give you a car loan if your credit cards are maxed out, a business will have trouble finding long-term financing solutions if their liabilities are too high. By reclassifying some of these liabilities through off balance sheet financing, additional borrowing capacity can be freed up.
  • Flexible Relationships – Are you leasing vital equipment from a third party? Do you desperately need to sign a new agreement with your suppliers? You might find these tasks difficult if your debt levels exceed their preferred limits. Many vendors only want to deal with companies they feel to be financially healthy, thus they place limitations on debt in their contracts. Through receivables financing, factoring, and other off balance sheet financing, you can meet these obligations and enhance your business relationships.
  • Reported Numbers Unaffected – If you’re trying to encourage others to invest in your company, it’s important to keep the ratios on your balance sheet looking as attractive as possible. Taking on new debt in the form of a loan will affect your reported numbers negatively, while off balance sheet financing does not.

If you’d like to learn more about utilizing receivables financing or factoring for your own business, contact The Commercial Financial Group today. We’d be happy to explain how the entire process works, as well as what aspects of your business we’ll need to know about in order to move forward.