When should small businesses use short-term financing?

                                                By  Corey Rockafeler

The legendary Wall Street analyst, Don Hayes would regularly posit : "money goes where it is treated best." Small business owners should take that to heart when making financing decisions. Too frequently many small businesses commit a fatally flawed mistake - making long term strategic decisions with expensive short term money. Sometimes that is  due to poor decision makingwhen searching financing options. Other times impacted personal credit, specific industry restrictions, lack of business depth, or other personal financial travails can also pose significant financing obstacles in securing long-term well-priced capital.

The most important baseline in determining if you should embrace short term financing is your bottom line - what is the cost of capital versus the return on the money? Your return must exceed the interest you will pay. If you are securing financing for a particular project that will generate a 50% return, then it makes sense if the money is costing you 25%. Conversely, paying 20% when your gross margins are in the single digits  is not a sound strategy.

Life is all about the unknown, unforeseen, and unexpected. The inherent volatility of small business ownership usually mandates having a financial cushion. That is easier said then done. Don't fall prey to utilizing expensive short-term financing unless you have exhausted all other options. If you do decide to venture into the short term financing space, look for terms without collateral, or a prepayment penalty-in case you want to pay off early.