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Off Balance Sheet Financing

This is neato torpedo stuff and pretty simple.  I'll give an example of a very popular off-balance sheet financing called a sale-leaseback.

Let's say your company owns an office building and occupies it.   On your balance sheet is something like this:

Long Term Assets    
  1 Main Street $2,000,000
  minus accumulated dep. $500,000
  Total $1,500,000
     
Long Term Debt Mortgage on 1 Main Street $1,000,000

Your mortgage and taxes on the building are $15,000 per month.

So it turns out that your head of procurement was sleeping with one of your vendors and bought $500,000 million worth of toilet paper just before taking early retirement.  You need some cash fast.

You sell the building for $1,500,000 (book value) and lease it back from the seller for, say, $18,000 per month.

Your balance now looks like this:

Long Term Assets    
  Total Zilch
Long Term Debt    
  Total Zilch

Ah, the wonders of accounting.  Now, for the minor cost of $3,000 extra per month, you paid off your cash shortage.  What's the financial difference for the company?  Just an increased payment.

You could do with with any asset.  In fact, here's a good trick - find a company with lots of assets.  Buy it and make yourself CEO.  Sell all the assets and lease them all back. Report freaking high cash flow to Wall Street. When the stock rallies, sell.  Now, take that buckus-load of cash you now have on the balance sheet and pay yourself huge, womping bonus.  Retire.  Ignore the screams in 2 years when the company runs out of cash and has no assets.

Think I'm kidding?  Read the Wall Street Journal.

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