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refers to ways companies raise money that do not appear as loans or injections of capital on their financial statements. Joint ventures, R & D partnerships, and leases (rather than purchases of capital equipment) are popular methods of off-balance sheet financing. Companies usually obtain funds in joint ventures by combining their know-how or product with a partner’s money. The company may contribute its know-how to a joint venture funded by another party and receive royalties as the venture succeeds. The company may even retain significant control over how the venture operates. The arrangements can also permit the company to purchase the joint venture or the product and know-how at a future date. By using a joint venture instead of funding the project out of its own funds, the company can accomplish an important objective while preserving its cash for other purposes. R & D partnerships work in much the same way. Generally, the company contributes know-how about a certain product to a limited partnership whose other partners contribute money to fund further development of the product. In this way the company gets its development funded without affecting its balance sheet. If the development succeeds in producing a marketable product, the company may either pay the partnership a royalty or purchase the product for a price that nets the contributing partners a fair return on their investment. Leases preserve company funds by enabling a company to use equipment or property without having to purchase it. In so doing, the company usually avoids having to come up with a substantial down payment and does not show the leased equipment as an asset on its balance sheet. As with other off balance sheet financing techniques, leases can benefit a company by permitting it to accomplish a company goal with a minimum of cash. Off balance sheet financing often depends on the ability to transfer some tax benefit to an investor or requires a company to part with more control or ownership of its product or know-how than it would otherwise. Sometimes the trade-off is in the upside potential to the company, with the company having to share more of the potential profit from a project to obtain off balance sheet financing than it would if it financed the activity in another way. But sometimes off balance sheet financing is the best or only alternative to keep a company project alive. When this is the case, the ability to keep a project going without depleting a company’s other assets can mean more profits for the company and a better deal for the investor. See: Cash Flow, Joint Ventures, Licensing, R&D Partnerships. |
