Coming Up Short Short-term financing could help your company overcome temporary setbacks or cash-flow issues.

For Idaho entrepreneur Leo A. Geis, running his commercialaerial photography business is somewhat akin to working without anet. Inconsistent customer demand, changing technology, and theneed to rapidly expand into new geographic markets all make for anunpredictable commercial existence. "There is no cookbook fora company like this, so we're guessing a lot," says Geis,46, whose Idaho Airships Inc. also specializes in forensicimaging for use in litigation. "Because of that, we [need]buffers financially that you don't [need] in established ormore predictable markets."

One of those safeguards has been short-term financing. Not longafter launching the Boise company in 1997, Geis had to upgrade hisphotography equipment to get better aerial images. To fund theunanticipated purchase, the half-million-dollar company borrowed$80,000, most of which was financed for just one year. The interestrate was about 4 percent higher than for a longer-term arrangement,but the flexibility was well worth the cost, in Geis' view."We don't know what we're making next week or fourweeks from now," he says. "It allows us to make a minimumpayment if necessary or to load the payment withoutpenalty."

Though the company could have used its own capital to fund thetransaction, Geis thought there were more productive ways to usethe cash. "We used financing instead of cash to remainprepared for a variety of competitive potentials, such as mediacampaigns," he says. The ease with which he could obtainshort-term funds also allowed the company to capitalize quickly ongeographic expansion opportunities, which are imperative in hisindustry. "We might have to make major decisions, like openingup a new market, in four days," says Geis, who now operatesnationally. "There is no way to go out and acquire equitycapital or long-term high-dollar financing."

Filling a Temporary Void

For a quick-moving company like Geis', a primary benefit ofshort-term financing is its flexibility; with it, a business canadapt swiftly to changing market conditions while conservingworking capital. Short-term financing can also serve as a lifeline,helping sustain a shaky business operation until it gainscommercial footing.

In reality, too little capital can quickly derail a developingcompany, yet many entrepreneurs don't appreciate the importantrole that short-term financing-usually a loan or line of credit ofup to one year-plays in cash-flow management. Indeed, an interimfunding arrangement not only allows businesses to take on biggerdeals and increase sales, but also helps ensure they won't runout of operating capital before securing more permanent financing.Rapidly growing companies are often the most vulnerable to capitalshortages, despite their sometimes-spectacular sales records."Often, the businesses that are growing have a need for cashthat's just as great as a business in decline or in temporarytrouble," stresses Houston accountant Calvin Martin."Growth requires additional accounts receivable, and they donot generate cash until they're collected. At the same time,you're paying for rent, for labor, for all your expenses thatrequire cash."

Whether a business is growing at breakneck speed or developingat a more controlled pace, winning the cash-flow battle requiresvigilant monitoring of sales activity, expenses and customerpayment patterns. This allows owners to pinpoint and deal with acash-flow deficiency before it evolves into a full-scale crisis."If sales are declining, you need to find out why,"Martin advises. "You may need short-term financing to pump upthose sales through advertising and promotion."

Spend Wisely

Bear in mind that short-term financing isn't ideal for allkinds of capital shortfalls. As a general rule, short-term debtshould fund business activities that will generate cash flow torepay the loan. Businesspeople need to distinguish between atemporary investment in current assets and a permanent investment,says consultant John Barrickman, president of New HorizonsFinancial Group in Roswell, Georgia. "With a temporaryinvestment, you finance the purchase of the asset with the intentof liquidating the asset in the normal course of business." Anexample is a retailer who builds up inventory in the fall inanticipation of the holidays: "They'll sell the inventoryduring the Christmas season and pay the loan back in January, andnot have another need until the subsequent fall," Barrickmansays.

On the other hand, a company that has to constantly replenishits inventory may have difficulty managing short-term debt. "Alot of times, the lender will finance it with a line ofcredit," he says. "But every time that line matures, theborrower better be sure the lender is prepared to renew it or[convert the debt to a term loan], because, if they don't, theborrower is going to have to find another institution to loan themthe money." Short-term financing is also risky if a businesssuffers a temporary setback but its lender refuses to extend theloan period. "It's a shame to see a company with positivesales growth and positive earnings [lose] its ability to obtainsupplies to build their products or to deliver theirservices," says Rick Vycital, regional director of theIdaho SmallBusiness Development Center in Boise.

While entrepreneurs sometimes have only themselves to blame forcash-flow difficulties, external market forces, such as laborshortages or oil prices, can wreak havoc on even well-runcompanies. In Geis' case, soaring gas prices generateuncertainty. "If gas goes to $3.50 a gallon, using an airplaneis going to go right down the tubes," he declares. But ratherthan sit back and hope that rising fuel costs won't limitoperations, he has used interim financing to help fund the purchaseof energy-efficient gear. "[Without short-term financing],I'd be stuck with a particular business model for two or threemore years every time I did something," Geis adds. "Andtwo or three years is two generations right now in terms ofbusiness cycles in my industry."