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Having a business emergency fund is important to maintaining a balanced business budget. Not only can it help businesses navigate an uncertain economy, but it can also protect them from financial challenges and unexpected expenses.
According to the Federal Reserve’s 2022 Small Business Credit Survey, 94% of employer businesses experienced financial hardship in the past 12 months. Of these, 81% cited rising goods, services and wages as their main economic concern.
Businesses are not the only ones feeling the financial burden. According to Bankrate’s annual Emergency Savings Report, 63% of U.S. adults say inflation has reduced their savings for unexpected expenses.
Because many business owners invest personal funds in their businesses, a lack of savings can lead to personal and professional financial problems, making a business emergency fund essential to the survival of small businesses. I am.
key insights
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81% of Americans will not increase their emergency savings in 2023, and 60% of Americans feel behind in this area. (Bank rate)
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53% of small business owners reported using personal funds to address business financial challenges in 2022. (Federal Reserve Bank)
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63% of Americans do not expect their personal financial situation to improve in 2024. (Bank rate)
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In Q4 2023, 50% of small businesses cited inflation as one of their biggest challenges. (SME index)
What is a small business emergency fund?
A small business emergency fund (also known as an emergency fund) is a savings that businesses can draw on in times of emergency or financial hardship. Ideally, your business emergency fund should be separate from your business checking and savings accounts. Examples of expenses that should be covered with an emergency fund include:
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Rent or commercial loan payments
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utility bill
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Inventory and raw materials
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business insurance
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Business websites and associated costs (especially if your business is involved in e-commerce)
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Employee pay and benefits
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Debt repayment
Why start a business emergency fund?
All businesses need emergency funds to cover unforeseen circumstances such as market downturns, emergency equipment repairs, and operating expenses.
According to Bankrate’s annual Emergency Savings Report, 66% of U.S. adults would worry about having enough emergency savings to cover next month’s living expenses if they lost their primary source of income. Additionally, 22 percent of U.S. adults say they have no emergency savings.
Saving for emergencies can help reduce worry and stress for business owners. Here’s how an emergency fund can help your small business maintain financial resilience.
Protection against emergencies
As the name suggests, a business emergency fund helps cover emergencies that occur to your business. Because emergencies are unexpected, not having an emergency fund available can make it difficult to plan your business budget.
Types of emergencies that may affect small businesses include:
Protect your assets and improve stability
An emergency fund helps protect your business and personal assets. For example, if you take out a business loan, you may have signed a personal guarantee. Alternatively, the loan may have been backed with business assets as collateral.
If you repeatedly miss payments or default on your loan, lenders may target your business or personal assets to repay you. If you miss a payment due to insufficient funds, your business and personal credit history can also be negatively affected. An emergency fund can help prevent that.
Cash flow management made easy
Not having an emergency fund for your business is the same as living paycheck to paycheck. An emergency fund can help you weather economic ups and downs without putting additional strain on your business or personal finances. Even if your revenue declines or an emergency occurs, you’ll have the funds to cover your operating expenses and keep your business running.
Less reliance on debt financing
Some business owners rely on small business loans to help finance their businesses through unexpected expenses or months of lost income.
There’s nothing wrong with having a business credit card or business loan that you manage responsibly, but having a business emergency fund will make you less reliant on debt financing for emergencies . This is beneficial in the long run, as using debt financing to cover emergencies can easily spiral out of control if a company cannot manage its repayments.
Supporting business opportunities and growth in a timely manner
If you come across an unexpected opportunity or gap in the market, your emergency savings will allow you to take advantage of it. For example, you can use your emergency fund to produce or provide new products or services for which you otherwise would not have funds. It also avoids borrowing money to bring products and services to market.
Please note:Using your emergency fund for a business opportunity can be risky, so be sure to weigh the pros and cons before proceeding.
conclusion
An emergency fund can help your business remain resilient despite the challenges it may face. A business emergency fund can help you create new opportunities, cover unexpected costs, and protect your assets. Typically, you’ll save a few months’ worth of expenses as your business emergency fund. Although it is recommended to save a significant percentage of your income, having any amount saved for emergencies is a step in the right direction.
FAQ
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How do I create an emergency fund for my business?
You can create an emergency fund for your business by putting money into a separate business checking or savings account. Saving 10% of your business’s monthly revenue is a good place to start, but you can adjust this number based on your business’s cash flow.
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Is $5,000 enough for your emergency fund?
Depending on your expenses, a $5,000 emergency fund may not be enough for a business or personal emergency fund. The best way to determine how much money you need in your emergency fund is to calculate your monthly expenses and multiply that number by at least 3. Ideally, you should have enough of an emergency fund to cover three to six months of expenses.
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Is an emergency fund the same as a business savings account?
A business emergency fund is a type of business savings, but it’s usually separate from a business’s other savings accounts. An emergency fund is a business account that you use to save money specifically for emergencies. Sometimes called cash reserves. However, your company may have other deposits or accounts that use it, such as a savings account for operating profits.
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