It’s easy to forget how an unexpected event can threaten the financial stability of a small business. However, unavoidable life situations, along with their unpredictable expenses, don’t have to be catastrophic. Having a rainy day fund in the form of cash supplies, a line of credit, and access to other types of will keep your business operating through tough times and emergencies.
How to Create an Emergency Fund
Start small, especially if your business is new and you don’t feel you have enough money to put away a significant amount right away.
Brett Child, Lendio’s Executive Vice President of Sales, says “businesses need to grow first before they can start saving.” Until your business hits a critical mass, you won’t have a strong enough understanding of how your revenue and expenses will scale. “It’s important to understand the industry and market trends, and how it will affect your business.”
Once you reach that level of production, saving will be easier. You’ll have enough revenue to set aside a small portion in case of emergency, and you’ll have a better understanding of how much cash you will need to have saved if disaster strikes.
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How Much Money Should Be Saved In an Emergency Fund
The amount of money you set aside for a rainy day depends on how long you’ve been in business. “If your operation is new and still growing, in general, there should be about 30 days worth of money in the emergency fund,” says Child, “As your business continues to grow, you’ll be on track to put more cash into your fund, up to 90 plus days”.
The most important part of an emergency fund is to be able to access the cash immediately when a need arises. Even for more mature businesses, saving for an unexpected disaster can also mean delaying expansion or growth plans.
It’s critical to put financial security measures in place to avoid disaster when unexpected expenses or challenging situations appear during the growth or expansion process.
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Other Lifelines a Small Business Should Have in Place
Emergency funds can be more than just a savings account. To ensure your house is in order as a small business owner, work on building good personal credit, pay your vendors on time, and . This will also give you access to several other lifelines beyond having a full savings account.
Business lines of credit
A is a loan that allows you to withdraw money, when you need it, from a set amount instead of borrowing a lump sum. Business lines of credit are a great option if you’re looking to buy goods, grow your business, and/or expand your company, and they can also be an invaluable lifeline in case of emergency.
Business credit cards
A is great for capital upgrades such as computers. Like personal credit cards, business credit cards offer the benefit of rewards like cash, points, or miles based on how much you spend. If you have trouble staying within budget or tend to overspend, be careful with cards. Also be aware of annual fees and high interest rates; always do your research before applying.
Having emergency funds in place will be more than just a security blanket for your business; it will help you through any rough patches and can also set you up for growth when the time is right. Because every business is different, it’s important for owners to take an in-depth look at their finances, then set a savings goal, and finally, work toward that goal.
Sara Amato is a graphic designer, writer, and contributor to the . Currently based out in Colorado, she was born in New Jersey and has lived in Indiana, California, Arizona, and Illinois. When she’s not designing or writing, she’s probably watching TV or eating pizza.
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