Running a small business is an exciting venture but can be filled with financial ups and downs. From seasonal fluctuations to unexpected repairs or economic shifts, having a financial cushion can make the difference between staying afloat and closing the business. That’s where an emergency fund comes in—a simple yet powerful tool to build financial resilience.
An emergency fund is a must-have for any small business owner. More than just a place to store money, an emergency fund provides a cushion and confidence in uncertain times. Let’s explore why every small business owner should prioritize building an emergency fund, how to start one and how to make sure it works when it’s needed most.
What is an emergency fund?
An emergency fund is a reserve of money set aside to cover unexpected expenses or disruptions in business operations. Think of it as your business’s financial safety net—it’s there to catch you when things don’t go according to plan. Essentially, it’s a dedicated account that holds money for unplanned emergencies that will help a business avoid closing or relying on debts.
Differing from general savings or reinvestment funds, emergency fund accounts are strictly for emergencies such as:
- Unexpected equipment failure or major repairs
- Natural disasters and disruptions
- A sudden drop in revenue or loss of key clients
- Temporary closures or supply chain disruptions
- Economic downturns or recessions
The importance of an emergency fund cannot be overstated. When you’re prepared, you can navigate challenges with confidence and avoid scrambling for high-interest loans or personal resources.
Why small businesses need an emergency fund
- Protection Against the Unexpected Without Panic: Disruptions can happen at any time. Whether it’s a power outage that halts production or a delayed payment from a key client, having an emergency fund ensures your business’s operations aren’t disrupted when unexpected costs arise.
- Shielding Personal and Business Assets: Separating personal and business assets and expenses is crucial for financial clarity, limiting personal liability and clear tracking of expenses. Using personal guarantees to secure loans puts your personal savings and credit at risk during tough times.
- Stabilizes Cash Flow Management: Even healthy businesses can experience fluctuating levels of income due to slow periods, delayed payment from customers or economic shocks. An emergency fund can ensure the business can continue to operate and serve clientele during difficult times.
- Avoid Unfavorable Dependence on Debt: Relying on credit cards or quick business loans during an emergency can lead to long-term financial strains. Having your own capital and being prepared for your business can limit high interest rates and maintain your credit.
How to build an emergency fund
Every dollar set aside brings you and your business closer to a more stable and secure foundation. Follow these steps to start building your emergency fund today.
Step 1: Determine How Much You’ll Need
The ideal amount of funds needed in your emergency fund will vary depending on the nature of your business. With many influential factors in our economy, larger emergency funds that cover six to twelve months of expenses offer the most security. However, a common benchmark is saving enough to cover three to six months of operating expenses. Calculating monthly expenses such as rent, payroll, utilities, supplies and other critical operating expenses is a great starting point.
If three to twelve months seems daunting, start smaller. Even aiming for one month of expenses and building steadily is an impactful place to start.
Step 2: Create a Separate Account
Using a dedicated, high-yield savings account will allow funds to be accessible but out of reach for everyday use. Having a separate business savings account from personal accounts will protect personal assets from any disruptions. Plus, your deposits can earn 8x the national average interest rates with Live Oak Bank’s business savings account, helping you build your emergency funds faster.
Step 3: Manage Your Funds Wisely
As your business grows, so will your expenses. It’s important to reevaluate your fund size at least annually as your expenses may require more of a cushion. Ensure that you are consistently investing and reinvesting to certify your emergency fund aligns with where your business is.
A smart investment in peace of mind
An emergency fund is more than just money; it’s confidence and freedom to make thoughtful decisions regarding your business. Having the flexibility to deal with unexpected challenges brings security that your business can survive trying times.
At Live Oak Bank, we believe in empowering small business owners and supporting successful financial planning. Whether you’re just starting your business or scaling up, building an emergency fund is a smart, strategic step toward long-term triumph. Start today. Your future self—and your business—will thank you.
