When hurricane Sandy blew through the eastern seaboard in the U.S. two months ago, many small business owners were tragically unprepared for the resulting damage and loss of business. It forced a spotlight on a issue common among smaller companies: when it comes to emergency planning, many, many small business owners fall short.
Running a Business is Full of Bumps
One of the givens of running a small business is that they are going to be some bumps along the way. Those bumps get bigger if you are relatively new to running a business, you are new to a particular industry, or you are working in an industry known for it’s unpredictables- this includes many retail concepts or any business that is tied to agriculture. How you handle these snags can often determine whether or not your business survives and thrives or closes up shop.
A widely circulated statistic from the Small Business Association (SBA) is that over half of new small businesses won’t be around a mere five years later. It’s a sobering statistic that underlies the fact that running a business is hard. It takes not only a lot of trial and error and a lot of work, but also a combination of using the right tools and the right connections at the right time. Look at any interview, article, or book ever written about successful entrepreneurs, and you’ll see this same message over and over again.
A Plan for Emergency Financing Can Help Buffer the Bumps
One way to help soften the blow of a set back is to have a contingency plan in place. When it comes to accessing money to cover your back during a down time, you may have a few options:
Access a business line of credit. In an ideal world, you would just go to the local bank and set up a revolving line of credit to help you smooth out your cash flow and to act as a buffer should a sudden cash shortfall occur. But the truth is these days that banks are still reluctant to offer credit to smaller businesses. If you are one of the lucky few with great credit and a killer business model than you should give it a go at your bank and see if you qualify. Alternatively, you could get a low interest business credit card and use it for occasional charges just to keep the account open in case you need to use it for some future cash emergency.
Take a little money out each month. Put aside a small portion of your monthly sales and put it into a rainy day account. To make sure you actually put this money aside instead of spending it on your business, you can set up a payroll deduction or have withdrawals automatically sent to a designated savings account.
Use your tax refund. Another possible option is to send either all or a significant portion of your tax return into your emergency fund. Though it may not be enough to fully fund the account, it can at least give the your emergency funds a boost.
A revenue windfall. If you happen to have an exceptionally strong period of sales, then you should try to send a portion of this money to your emergency account. Like the tax return above, you may not necessarily fund the whole account at this time, but you can get much closer to your goal.
Asset-based financing arrangements. Asset-based financing arrangements like accounts receivables factoring, business cash advances, and revenue based financing all have the benefit of being quick and easy sources of capital. Even more, they don’t rely on your business’ credit profile or industry. Asset-based financing could be used as an emergency fund backup, such as when not enough money was put aside.
In short, when it comes to your business financing needs, don’t forget to create a contingency fund for those unexpected expenses that can crop up, and where you are unable to put enough aside, know what other options are available to you. You’ll be glad that you did.