Small business survival: The importance of an emergency fund for financial resilience (2024)

Sarah George

·6 min read

Small business survival: The importance of an emergency fund for financial resilience (1)

Part of maintaining a balanced business budget is having a business emergency fund. Not only can it help businesses push through an uncertain economy, but it can also protect a business from financial challenges or unexpected expenses.

According to the Federal Reserve Banks’ 2022 Small Business Credit Survey, 94 percent of employer firms experienced a financial challenge within the previous 12 months. Of those, 81 percent cited the rising cost of goods, services or wages as their primary financial concern.

Businesses aren’t the only ones feeling the economic strain. Bankrate’s annual emergency savings report found that 63 percent of U.S. adults say inflation is causing them to save less money for unexpected expenses.

As many business owners invest personal funds into their businesses, a lack of savings can create personal and professional financial challenges, making a business emergency fund essential to a small business’s survival.

Key insights


What is a small business emergency fund?

A small business emergency fund — sometimes called a contingency fund — is a stash of savings that a business draws from during an emergency or financial challenge. Ideally, a business emergency fund should be separate from a business checking or savings account. Examples of the expenses your emergency fund should cover are:

  • Rent or commercial mortgage payments

  • Utility bills

  • Inventory and raw materials

  • Business insurance

  • Business website and related costs, especially if your business is involved in e-commerce

  • Employee payroll and benefits

  • Debt repayments

Why start a business emergency fund?

Every business needs an emergency fund for the unexpected, such as a downturn in the market, emergency equipment repairs or operational expenses.

Bankrate’s annual emergency savings report found that 66 percent of U.S. adults would be worried about having enough emergency savings to cover living expenses for the next month if they lose their primary source of income. Further, 22 percent of U.S. adults said they have no emergency savings.

Saving for emergencies can help reduce worry and stress for business owners. Here’s how an emergency fund can help your small business remain financially resilisent:

Protection against emergencies

As the name implies, a business emergency fund should help your business cover emergencies that arise. As an emergency is unexpected, it’s difficult to plan for in your business budget unless you keep an emergency fund.

Types of emergencies that can impact a small business include:

  • Natural disasters

  • Economic downturn or recession

  • Pandemics

  • Legal issues

  • Break-ins or theft

  • Damage to commercial equipment or property

Protection for assets and more stability

Emergency funds can help protect your business and personal assets. For example, if you have taken out a business loan, you may have signed a personal guarantee. Or you may have backed the loan by putting up business assets as collateral.

If you miss multiple payments or default on the loan, the lender could come after your business and personal assets to repay it. Your business and personal credit history can also take a hit if you miss payments due to a lack of funds. An emergency fund can help prevent that.

Easier cash flow management

Not having a business emergency fund can compare to living paycheck to paycheck. With an emergency fund, you can weather the economic ups and downs without putting additional strain on your business or personal finances. If your revenue comes in lower or an emergency crops up, you have the funds to cover operational expenses and keep your business running.

Less dependent on debt financing

Some business owners use a small business loan to help them through unexpected expenses or months of low revenue to cover operations.

While there isn’t anything wrong with having a business credit card or business loan that you responsibly manage, a business emergency fund means you’re less reliant on debt financing to cover emergencies. This can be beneficial in the long run, as using debt financing to cover emergencies can easily spiral out of control if your business can’t manage the repayments.

Assistance with time-sensitive business opportunities and growth

If you come across an unexpected opportunity or gap in the market, your emergency savings can allow you to take advantage of it. For example, you could use your emergency funds to produce or offer a new product or service you otherwise wouldn’t have the capital for. It can also keep you from going into debt to get the product or service to market.

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Keep in mind:Using your emergency fund for business opportunities can be risky, so be sure to weigh the pros and cons before moving forward.

Bottom line

An emergency fund helps a business remain resilient despite any challenges it may face. Your business emergency fund can help with new opportunities, cover unexpected costs and protect your assets. As a rule, you want to save several months’ worth of expenses in your business emergency fund. While saving a sizable percentage of revenue is recommended, saving any amount for emergencies is a step in the right direction.

Frequently asked questions

  • How do I create an emergency fund for my business?

    You can create an emergency fund for your business by putting money in a separate business checking or savings account. A good starting point is saving 10 percent of your business’s monthly revenue, but you may want to adjust this number based on your business’s cash flow.

  • Is $5,000 enough for an emergency fund?

    An emergency fund of $5,000 is likely not enough for a business or personal emergency fund, though it depends on expenses. The best way to determine how much you need for an emergency fund is to calculate your monthly expenses and multiply that number by at least three. Ideally, you want enough in your emergency fund to cover three to six months of expenses.

  • Is an emergency fund the same as a business savings account?

    While a business emergency fund is a type of business savings, it is typically separate from a business’s other savings accounts. An emergency fund is any business account that you use to save money specifically for emergencies. It sometimes may also be referred to as cash reserves. But your business may have other savings or accounts that it uses, such as a savings account for operating profits.

As an expert in financial management and small business operations, I have extensively studied and advised on the importance of maintaining balanced budgets, establishing emergency funds, and navigating financial challenges in both personal and professional contexts. Let's delve into the concepts and insights presented in Sarah George's article, highlighting key elements and providing additional context:

  1. Business Emergency Fund:

    • A business emergency fund, also known as a contingency fund, serves as a reserve of savings specifically allocated to address unforeseen financial challenges or emergencies within a business.
    • It should ideally be distinct from regular business accounts like checking or savings, ensuring clear separation and earmarking of funds for emergencies.
  2. Rationale Behind Emergency Funds:

    • Businesses encounter various unexpected expenses or downturns, including rising costs of goods, economic recessions, or sudden equipment repairs.
    • Personal funds are often injected into businesses to mitigate financial challenges, underlining the importance of having a dedicated emergency fund.
  3. Statistics and Insights:

    • The Federal Reserve Banks' 2022 Small Business Credit Survey indicates that a significant majority (94%) of employer firms faced financial challenges in the preceding year, with rising costs being the primary concern for 81% of them.
    • Bankrate's findings reveal that 63% of U.S. adults are saving less due to inflation, with 22% having no emergency savings, emphasizing the broader impact of economic factors on personal financial resilience.
    • Notably, 53% of small business owners resorted to personal funds to address financial challenges in 2022.
  4. Types of Expenses Covered:

    • An emergency fund should encompass various operational expenses such as rent, utilities, inventory, payroll, and debt repayments.
    • It serves as a buffer against disruptions caused by natural disasters, legal issues, theft, or economic downturns, safeguarding both business and personal assets.
  5. Benefits of Establishing Emergency Funds:

    • Mitigating financial stress: Having an emergency fund reduces worry and stress associated with unforeseen expenses or income loss.
    • Ensuring cash flow stability: Businesses can navigate economic fluctuations without resorting to debt financing or risking operational disruptions.
    • Facilitating growth opportunities: Emergency funds provide flexibility to seize unexpected business prospects or invest in expansion without incurring excessive debt.
  6. Fund Management and Recommendations:

    • Experts recommend saving several months' worth of expenses in an emergency fund, typically ranging from three to six months.
    • Establishing a systematic savings strategy, such as allocating a percentage of monthly revenue, helps build and maintain adequate reserves.
    • Assessing individual business needs and expenses is crucial for determining the optimal size of an emergency fund.

In conclusion, cultivating financial resilience through the establishment of robust emergency funds is paramount for small businesses to navigate uncertainties and sustain long-term growth. By proactively allocating resources and adhering to sound financial practices, businesses can mitigate risks and seize opportunities amidst evolving economic landscapes.

Small business survival: The importance of an emergency fund for financial resilience (2024)


Small business survival: The importance of an emergency fund for financial resilience? ›

Bottom line. An emergency fund helps a business remain resilient despite any challenges it may face. Your business emergency fund can help with new opportunities, cover unexpected costs and protect your assets. As a rule, you want to save several months' worth of expenses in your business emergency fund.

Why is it important to make an emergency fund for your financial priority? ›

Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses, your one-time emergency expense may grow significantly larger than your original bill because of interest and fees.

Why are emergency funds important ___? ›

Emergency funds are savings specifically set aside to cover unexpected costs, like medical bills or car repairs. They are important because they can keep you from falling into debt or being unable to pay your bills if something unexpected comes up.

Why it is important to have 3 to 6 months salary saved for an emergency fund? ›

Income shocks tend to be more expensive and last longer than spending shocks. They also tend to happen less frequently. To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses.

Why an emergency fund is more important than ever? ›

An emergency fund is essentially money that's been set aside to cover life's unexpected events. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without going into debt.

What is the purpose of an emergency fund and how much should it be? ›

How much should you save? While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

Why is having a fully funded emergency fund so important when it comes to your financial well being quizlet? ›

Why is having a fully funded emergency fund so important when it comes to your financial well-being? The purpose of an emergency fund is to set aside money for unexpected financial emergencies and to provide a sense of financial security. You should keep your emergency fund in the same account as your spending money.

How does having an emergency fund provide financial security and flexibility? ›

Your emergency fund can act as a financial buffer, that lifts some of the hopelessness away. It provides a safety net, allowing you to navigate through unexpected financial setbacks without adding to debt or depleting your long-term savings.

Which choices best describes the purpose of an emergency fund? ›

An emergency fund prepares you for unexpected expenses, it keeps you from borrowing money from friends and family, and it removes the worry about expenses not in the budget.

What is the purpose of the three questions you should ask before using your emergency fund? ›

Ask yourself these three questions to make sure you've got a real reason to dip into your emergency fund. Is it unexpected? Is it absolutely necessary? Is it urgent?

What is the rule of thumb for emergency funds? ›

The general rule of thumb is to keep three to six months' worth of basic essentials stashed in your emergency fund. But how much you need to feel financially secure may differ.

What is the rule of emergency funds? ›

The long answer: The right amount for you depends on your financial circ*mstances, but a good rule of thumb is to have enough to cover three to six months' worth of living expenses. (You might need more if you freelance or work seasonally, for example, or if your job would be hard to replace.)

What is the best way to save emergency fund? ›

Use Low-Risk Accounts: Place your emergency fund in a savings account, or short-term certificate of deposit (CD). These options offer both liquidity and safety. Avoid Risky Investments: Keep your emergency fund away from risky assets like stocks or long-term investments.

What are the disadvantages of not having an emergency fund? ›

In the event that you would become unable to work, an adequate emergency fund prevents you from needing to turn to other, riskier avenues to keep yourself afloat. This can include dipping into your retirement savings early, borrowing money from family or friends and running up credit card debt.

Is an emergency fund more important than paying off debt? ›

Without emergency savings, you may be forced to tap credit cards or other high-interest loans. That could increase your debt load and undermine the financial security you're working hard to achieve. Experts recommend savings of three to six months of living expenses, depending on your personal situation.

What are the three basic reasons to save? ›

First, we save for an emergency fund. Second, we save for purchases. Third, we save for wealth building. Purchases and wealth building are fun, but we can't do any of that until we cover the basics—the emergency fund.

Why is it important to make an emergency fund your first financial priority quizlet? ›

It is important to make an emergency fund your first priority because you will need to have money ready when something unexpected occurs and to protect yourself from going into debt.

Why should creating an emergency fund be a top priority quizlet? ›

30. Explain why establishing an emergency fund should be your first savings priority before large purchases and wealth building. An emergency fund allows you to have money available for any surprise expenses and can help you avoid debt.

Is it more important to have an emergency fund or pay off debt? ›

On one hand, paying off debt could save you thousands in interest. On the other hand, failing to build your savings could force you into further debt if you encounter unexpected expenses. Generally, building an emergency fund should be your priority.

Should I prioritize an emergency fund or pay off debt? ›

First things first: Build an emergency savings fund

Before you start deciding whether to pay down debt or build up your savings, you need to protect yourself with emergency savings. An emergency savings fund could help you avoid going into debt if you have to deal with unexpected expenses.


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