Does Your Small Business Need an Emergency Fund?

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The Federal Reserve Bank of New York found that almost half of all small businesses failed during the 2008 recession. With the potential for another looming, there are certainly some ways small businesses can prepare, like a business emergency fund. This fund will help weather the storm and keep the business running during difficult times.

Before you say it—we know it’s not easy to allocate money toward a new fund, especially as customer spending tightens. But if you can find a way to build even a small emergency fund, you’ll sleep easier and feel more prepared for whatever could come next. In this post, we’ll talk through emergency funds for your business.

What is a Business Emergency Fund?

A business emergency fund is a savings account that is specifically for your business. This account is for emergencies only and should never have any personal funds associated with it. As always, you want to avoid any potential confusion of mixing business and personal accounts. So, what do you use it for? Here are some common examples for small businesses:

  • Repair or replace equipment
  • Unexpected expenses
  • You need to cover payroll when cash flow is struggling
  • Unexpected closure of your business due to natural disaster, pandemic, or other circumstances
  • Sales slow down and you need to cover your overhead costs
  • Supply chain issues slow down inventory and cash flow

The common denominator in all of these reasons to open a business emergency fund is that they are all unexpected—at least to some degree. If you own a small business, you’ve likely experienced some of these problems (such as supply chain issues) in the past two years. Even when you know it’s a possibility, it’s difficult to plan for. This is where your emergency funds can help.

Benefits of a Business Emergency Fund

While the “emergency” in your business emergency fund sounds very intense, having an emergency fund in place isn’t just for natural disasters and pandemics. Anything that disrupts your day-to-day ability to turn a profit is an emergency to you.

One thing about a business emergency is that it’s likely to occur to your competitors as well. If economic conditions slow down sales across your industry, many competitors will slash investments across the board—even the ones that lead to revenue down the road. For instance, if competitors stop buying digital ads, but you’re able to allocate even a minimal investment from your emergency fund, you’re gaining a major advantage.

Another major benefit is that you’ll be insulated from any temptation to use your personal assets. During a business emergency, many small business owners decide to pull from their own savings in order to keep the business afloat. No business owner wants to face that decision, and a business emergency fund can help ensure you never need to.

“Okay, I get it. I need an emergency fund. How much money should it contain?”

Glad you asked!

How Much Money Should be in a Business Emergency Fund?

A good rule of thumb is to have three to six months of operating expenses saved in your business emergency fund. This may seem like a lot, but it’s important to have a hefty cushion in case of tough times. You probably don’t have that kind of cash on hand right now, but there’s not time like the present to start allocating a small percentage of profit toward an emergency fund. 

Once you have a goal in mind, the next step is to decide where to keep your business emergency fund. You should already have a business bank account. It’s easy enough to open an emergency fund there as well. This will make back-and-forth transfers a lot easier for you and give you peace of mind knowing all of your finances are in one place.

And that’s it. Now it’s time to start saving. Cut out a percentage of profit until you have enough in your account to cover 3-6 months of expenses. Even if you haven’t reached that point when your emergency arrives, you’ll still have some cash to continue investing in your business during hard or complicated times.

Saving for a business emergency fund can seem daunting, but it’s important to remember that even small contributions can add up over time. And the peace of mind that comes with knowing you have a safety net in place is invaluable.

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