It’s common knowledge that individuals and families should have at least six month’s worth of their expenses in a savings account to deal with emergencies. But did you know that having an emergency fund is a good business practice as well? The unexpected could come at any moment, and as the past four years have taught us the residual impacts of the unexpected can just keep coming and coming.
How and where do you start building out an emergency fund without negatively impacting your business right now? Let’s run through a few ways that you can use business financing to get you on the road to securing your business in the event of an emergency.
What is a Business Emergency Fund?
To start, let’s cover the basics: a business emergency fund is a savings account set aside to quickly cover unexpected expenses for your business. It is a fund that should be contributed to regularly and should not be accessed for anything other than a real emergency that could risk closing your business’s doors. To put it simply, this fund is your first line of defense when something risks interrupting your daily operations.
How Much Money Should an Emergency Fund Have?
The amount of money needed in an emergency fund will depend wholly on your business and its annual operating expenses along with other factors such as your inventory, receivables, and whether or not your business runs seasonally. All these factors, as well as your personal preferences as the business owner, will determine how much money you will need to handle what your business would consider an emergency. A good rule of thumb, though, is that your emergency fund should cover – at minimum three months worth of your business expenses.
Using a Business Loan to Boost Your Emergency Fund
If you are looking to quickly build or add to an emergency fund without impacting your existing cash flow and putting other business goals on the back burner, creatively using funds from a business loan could make that possible. Here are a few strategic ways you can use business loans (or other types of business financing) to build an emergency fund without sacrificing other areas of your business – some can lead to a quick build of an emergency fund and some require a long-game mentality.
Cover an Expansion or Improvement That Will Lower Overall Expenses
Using a business loan to expedite expansion or a business improvement is a classic way to boost your overall capacity and, eventually, your revenue. If investing back into your business means that you’ll make more profit down the line, you could allocate a percentage of all new revenue to invest in your emergency fund at a level that may not have been possible before making the improvements.
Let’s say, for example, an auto repair business has a plan to increase its capacity and efficiency by adding a new hydraulic lift to its garage. Using a business loan (or equipment financing) to buy the lift more quickly could increase the business’s rate of repair and eventually free up more working capital as a result. As long as the business eventually puts a percentage of that working capital back into an emergency fund, financing could help get that fund off the ground faster.
Cover Payroll to Expand Staff
Business loans are also a solid means for a business owner to cover payroll. Instead of using the loan to cover payroll when cash flow is low, consider, instead, using that loan to hire more employees or temporary workers which, in turn, could increase your profits over time. If high-achieving or strategically placed employees have the potential to make you more money more quickly, it can be more than reasonable to use a loan to expedite those workforce additions. It’s then, of course, essential that the business owner uses that capital boost to reinforce their emergency fund.
Refinance or Consolidate Current Debt
If your existing debt is spread across several lenders or is steeped in high interest, refinancing that debt could change up your monthly payments and give you more working capital. Especially if your business has a serious amount of credit card debt, it’s more than possible that refinancing or consolidating your business debt could help reduce your overall monthly payments. By bringing your monthly payments down and your working capital up, it’s possible your business could have more capital on hand each month to boost your emergency fund.
Buy Up More Inventory
Managing inventory is the basis of good daily operations. If you can find a way to pay less per piece for your inventory stock you’re confident will be sold, it may make sense to use a business loan to take advantage of bulk discounts to the fullest. If your business can turn that inventory win into a cash flow win, you can then reinvest that cash flow back into your emergency fund.
Using an SBA Disaster Loan
SBA Disaster Loans aren’t going to help establish an emergency fund unless your business has already been hit by a disaster. So, if your business is hit with a disaster and your emergency fund is either now depleted or never existed in the first place, applying for an SBA Disaster Loan could be a great way to quickly build back up your emergency fund and help get your business back on its feet.
Eligibility for SBA Disaster Loans is based on how the federal government and FEMA determine disaster zones. Keep a close eye on the SBA website to find out when or how your business could be eligible for a disaster loan.
Putting Loan Funds Directly into Your Emergency Account
The easiest way to use a business loan to build out an emergency fund is to simply directly deposit those funds into your emergency account. Of course, this would mean you already have the revenue coming in to cover the payments for that loan so this strategy should only be used when you want to and afford to quickly bolster that fund.
Other Financing Options Relevant to Emergency Funds
Business loans aren’t the only way to keep your emergency fund in good form. Here are a few additional financing options you could use to strategically build or add to your fund.
Line of Credit
While a line of credit won’t necessarily help build an emergency fund, having a well-maintained line of credit could free up some of your working capital and allow you to invest back into the fund more fully. A great example of how a line of credit can help free up cash flow is invoice management. Imagine that a business deals with many invoices that can take several weeks or months to pay out. Using a line of credit to cover expenses and then eventually paying them back through those paid-out invoices is a great way to boost your working capital.
Business Credit Cards
A business credit card could be seen as another line of defense between an emergency and your cash reserves. While business credit cards generally have quite high monthly interest rates, using that card instead of dipping into your savings or operating expenses is a great way to ensure your cash flow (and your ability to invest back into your emergency fund) stays consistent.
Every Business Needs an Emergency Fund
No business is insulated from unexpected expenses. Building an emergency fund that can get your business through essential repairs or major changes can be the difference between whether or not your business exists tomorrow at all. Especially if your business is behind on its emergency fund targets, using a business loan to quickly free up your working capital could be just what is needed to get you on the road to building the emergency fund you need.