Off balance sheet financing - what value does it bring to the firm?

Abstract

Off balance sheet financing is one of the most popular topics in the business literature today. It is popular because it is seen as a means to improve returns and bring value to the shareholders. This paper identifies four key components that must be considered to make a proper value judgment. They are cost advantages, management options, risk transfer and transaction costs/asymmetric information. It then looks into how each of the different off balance sheet instruments can bring value from these four components. The result was that off balance sheet financing does bring value to a firm. It will bring value because it can solve problems that other financing strategies cannot, problems such as access to capital, cost of capital, core competencies and alter the risk profile of the company. A Volvo business unit was used to do an empirical examination, on the accounts receivables and studied to see if factoring and securitisation bring value to Volvo. It was found that presently, only factoring with penalty interest being charged brought value. Otherwise, factoring and securitisation do not bring value because Volvo did not have the problems that they solve.