Small business owners don’t always give enough thought to how they would respond to an unexpected financial emergency, and when those emergencies show up, they are left scrambling for a solution. In fact, according to a U.S. Bank study, 82 percent of business failures are due to poor cash management.
Don’t be one of these people! Instead of waiting till a financial crisis is already at your doorstep, you can easily set up a preemptive system for handling sudden cash shortfalls.
That said, there are three main areas to consider in your financial emergency planning: developing a disaster plan, taking out a business insurance policy, and knowing where to get emergency financing. We will go through each one of these strategies below.
Developing an Emergency Plan.
When the unexpected strikes, you want to have a system already in place that details the steps you and your employees need to take as well as the resources you have at your disposal to smooth out the difficulties along the way. Your emergency plan should include a clear breakdown of what needs to be taken care of and who will take are of them. Some steps to include are:
- Assessing total unexpected expenses or damage, if applicable
- Contacting your insurer(s) to get coverage support and information
- Contacting vendors and suppliers regarding any changes to outstanding or reoccurring orders and the payment of outstanding balances.
- Tapping emergency funding resources (more on this below)
- Where there will be a disruption in service, then you’ll also need to let your customers know what to expect in the coming days and weeks.
Taking Out a Business Insurance Policy.
In order to save money, many small business owners avoid taking out even the most standard insurance policies. While it’s true that you’ll save money on monthly premiums, it may cost you big time if you end up needing coverage later on. For small businesses, there are basically five kinds of business insurance to consider:
- Comprehensive general liability insurance. This is a general form of liability insurance that covers claims for bodily injury and property damage as a result of visiting the business’ property, using products or services offered by the business, and even the damage caused by the negligence of an independent contractor.
- Workers’ compensation insurance. If you hire employees, then worker’s compensation insurance will provide financial coverage in the event of a job-related injury or disease.
- Business property insurance. This form of business insurance protects you against the loss of inventory or equipment in the event of a flood, fire, or other physical disaster.
- Business credit insurance. Credit insurance is designed to protect your business from clients who fail to pay their invoices due to insolvency or bankruptcy. Credit insurance usually covers a portfolio of the business’ customers, but it is also possible to cover single transactions or trade with only one customer.
- Business interruption insurance. This kind of insurance will help cover some of the income lost during an emergency till the business recovers. Usually, such policies cover your fixed operating expenses, lost profits, and the cost to set up a temporary location.
Getting Emergency Financing.
In order to make it through a financial emergency, one of the most basic elements to have in place is a quick and accessible source of financing, and the truth is that there may be many options at your disposal. Here is a brief rundown of three popular options:
- Create an emergency fund. Most financial experts suggest that business owners put aside enough money to cover between three to nine months of basic fixed expenses. You could do this by taking out a small portion (5-10%) of your monthly revenues and put it into a business bank account exclusively dedicated to your emergency fund. Think of it as a rainy day tax. To make sure you actually put this money aside instead of spending it on your business, you can set up a payroll deduction or automatic withdrawals. Additionally, you could take advantage of a sudden cash windfall, such as a tax refund or an exceptionally strong period of sales and dedicate a portion of this money to your emergency account.
- Maintain a business line of credit. While it may not be so easy these days to just walk into your local bank and set up a revolving line of credit, you may be able to at least set up some overdraft protection on your business accounts. This will help you to avoid the bounced checks and declined payments that will only make your situation worse. A potential bankruptcy on your credit report can affect your business. Alternatively, you could maintain a 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.
- Short-term micro loans. If you haven’t been able to put enough money aside to cover your expenses, then you may get some quick financial relief via a short-term micro loan or business cash advance. Though these options may be a bit more expensive than a standard bank loan, the requirements for approval are relatively easy to fulfill and the money can typically be funded in a matter of days.
No matter how great or uneventful things may seem now, life can throw you an unexpected curve ball, sending your business into a sudden financial emergency. The more prepared you are, the better your chances of successfully riding out the storm.