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Emergency Funds Blog: What Are They?

May 02, 2023
Posted by: Stearns Bank
A small business owner standing in her business

Owning a small business can be an exciting journey filled with amazing opportunities and endless possibilities. However, as with any great adventure, there are bound to be unexpected twists and turns along the way. That's why having an emergency fund is crucial. 

Whether you’re a newbie or a veteran in the entrepreneurial world, you can never predict when a money problem may strike. According to CBS News, 44% of U.S. small businesses have less than three months of cash reserves, leaving them vulnerable to financial emergencies. Don’t let yourself be part of that 44% percent — read on to learn why having an emergency fund is essential for small business owners!

What Is an Emergency Fund?

A cash fund is a cash cushion that can enable the business to handle any financial obligations in an emergency or unexpected situation, without affecting the business’s cash flow or making the business take on more debt.

The Benefits of Having an Emergency Fund

Having an emergency fund for your small business can provide aRepairman fixing a broken HVAC unit myriad of advantages, ranging from shielding you against unforeseen expenses to enabling you to seize growth opportunities. 

Unexpected Expenses

Underestimating the amount of capital required to cover daily expenses is a leading cause of small business failure, as per the Chamber of Commerce. These expenses can come in many forms, from a piece of equipment breaking down and needing urgent repairs to unexpected legal fees or tax bills that were not accounted for in the budget. 

This is where having an emergency fund can be a game-changer. By setting aside a portion of your revenue specifically for emergencies, you can mitigate the risk of unexpected expenses derailing your operations and ensure that your business stays afloat, no matter what comes your way.

Natural Disasters 

Natural disasters and weather-related incidents can wreak havoc on small businesses, causing significant financial strain and disruption. From hurricanes that can knock out power for days to tornadoes that can damage or destroy buildings, these events can leave small business owners struggling to keep their doors open.

For example, Hurricane Harvey in 2017 caused an estimated $125 billion in damages and losses, affecting thousands of small businesses in its path. Even smaller weather incidents, like heavy snowstorms or prolonged heat waves, can lead to decreased foot traffic and lost revenue for small businesses. That's why it's crucial to have an emergency savings plan in place — to help cushion the blow of these unexpected events. 

Growth Opportunities 

As a small business owner, you're always on the lookout for opportunities that can help grow your business. Whether it's expanding your product line or entering a new market, seizing an opportunity often requires quick action and a significant investment of resources. 

This is where an emergency fund can be a valuable asset for your business. By having a financial cushion in place, you can capitalize on favorable market conditions without having to take on additional debt or sacrifice long-term goals. 

In other words, an emergency fund can give you the flexibility and agility to pivot and invest in opportunities that could significantly boost your business's growth and profitability.

Peace of Mind 

Every day in the life of a small business owner presents a rollercoaster ride of highs and lows. One moment you're celebrating a big win, and the next, you're hit with unexpected expenses that threaten to derail your progress. This is where having an emergency fund can provide a much-needed sense of calm in the storm. 

By having a solid emergency fund in place, you can avoid the panic that comes with unexpected expenses and instead focus on driving your business forward. Plus, knowing that you have a financial cushion can give you the confidence to take calculated risks and invest in growth opportunities without worrying about the consequences of failure.

How Much Money Should You Set Aside in an Emergency Fund? 

Although you comprehend the significance of having an emergency fund, determining the appropriate amount to set aside can be challenging. How much money do you actually need to have in reserve?

The general rule of thumb is to aim for at least three to six months' worth of operating expenses. This ensures that you have enough cushion to cover unexpected costs and keep your business running smoothly in case of a crisis. 

Of course, the amount you need to save may vary depending on factors such as the size and stability of your business, as well as the industry you operate in. For instance, if your business experiences seasonal fluctuations in revenue, you may need to set aside more to cover expenses during slower months. 

Tips to Grow Your Small Business Emergency Fund 

Digital chart showing growing small business savingsIf you're ready to take your small business fund to the next level, there are plenty of educational tips and tricks to explore. 

For starters, consider opening a high-yield savings account to earn more on your hard-earned money. CDs are another option that offers fixed interest rates for a set period of time, giving you a predictable return on your investment. 

To maximize your savings, you can also create a budget to help you manage your expenses, reduce unnecessary costs, and increase your revenue through targeted marketing and sales strategies. 

Whether you're a new startup or an established business, prioritizing your savings can help you achieve your long-term goals and secure your financial future.

Stearns Bank BusinessSmart Savings Account

Secure your small business's financial future with Stearns Bank's BusinessSmart market savings account — a no-brainer choice for serious entrepreneurs. This account offers the best of both worlds — high interest rates for accelerated growth, and no hidden fees or minimum balances to eat away at your savings. With FDIC insurance, you can trust that your hard-earned money is safe and secure.

Why Not Choose More with Stearns Bank? 

If you’re looking to earn more with your money, Stearns Bank is the place for you. With highly competitive interest rates, you can earn more on your CDs, as well as your checking and savings accounts. 

Whether you're saving for emergencies, opportunities, or long-term goals, a Stearns Bank account can be the key to your success. Don't wait any longer, connect with our trusted team today to start your journey toward financial freedom!

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