How To Set Up An Emergency Fund For Your Small Business

A person counting money, symbolizing ways to set up an emergency fund for your small business


When running a small business, one of the common issues is that you always need
more money. The lack of funds is the number one reason why a lot of startups close after some time.

With that in mind, it is vital to learn how to set up an emergency fund for your small business. Now more than ever, since the companies are putting a lock on their doors because of the COVID-19 pandemic, it’s vital to have something to fall
back on.

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Look for alternative sources of income
Since it is still not possible to create money out of thin air, it is a good idea to look for
additional sources of income to boost your small business.

While there is a plethora of options, not all will bring you the same amount. Some are efficient, others not so much. Today, we are going to look at how you can:

  • use social media to generate income
  • benefit from blogging
  • use passive income strategies
    Furthermore, we will discuss:
  • how to calculate the size of the fund needed
  • the setup technicalities
  • when to use an emergency fund
  • alternative solutions

Social media – a money-making machine!

A substantial number of businesses use social media platforms to run their operations and earn money. The best approach is to use it for promotional purposes, both for your services or affiliate products. For example, Pinterest is an excellent way to earn money through promotions. Its versatile options give you a lot of freedom to promote your company and get new customers through sharing.

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Pinterest mobile app icon, representing ways to make money with Pinterest
Pinterest is, among other social media platforms, a fantastic tool to earn money by promoting affiliate products

Blogging as a way of making money on the side

Blogging is not only a way to expand your business, but to put it into the spotlight too.  It is also a good strategy to make additional cash on the side. If you are an expert on
a subject or passionate about a specific niche, use that to your benefit.

You will enjoy other benefits of creating a professional blog page as well. You can share valuable information with your clients, promote products, or build backlinks that will connect you with other strong companies in the business.

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Passive income strategies

Passive income is the mother of all money-making strategies. Once you can create
something that will generate money without you lifting a finger, you will have the
opportunity to save considerably and help your small business develop.

Affiliate marketing is an example of a very successful passive income strategy.
Another idea is to try dropshipping. It is buying goods from a third party for an
affordable price and reselling them on your website. A benefit is that you don’t have to
worry about stockpiling products that may not sell. When a client makes an online order, you purchase the needed quantity and resell.

Finally, you can always try to rent your
place to AirBNB or find a way into the real estate market. Many investors earn money
by flipping houses or apartments. It’s buying cheap apartments, remodeling them,
and selling them at a higher price.

How to calculate the size of an emergency fund?

Building an emergency fund is a smart strategy, but you must know how much money you need. The worst thing that can happen is to make an error in the calculation and get less money than you actually need.
To avoid this mess, you should do a couple of things:

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  1. Check your receivables and inventory. A full stock always creates additional
    expenses. Furthermore, if you drag out your receivables, you will need a larger fund.
  2. Consider the structure of your business. Many things can fit into this category, like how many employees you have, if you are the sole owner, whether you are using office space or not. It is also essential to think about your goals for the next few years. If you are planning to expand your small business, you will need more funds.
  3. Personal savings also play a significant role. We spoke earlier about making some money on the side. If you have a personal fund on the side, it will be easier to run the business. See how long your business can go without financing itself. If you can
    cover for that period and get the company rolling, you will most likely make it.
A person sitting at a desk, looking at company papers with numbers and statistics
Before you set up an emergency fund for your small business, you need first to do extensive research and determine the size of the fund.

4. Working hours and seasonality will help you get a correct calculation. It makes
a massive difference if you are only active during a part of the year or the full 12
months. Some services are seasonal.
When you consider all of the factors in the list, you should be able to determine the
approximate amount needed for your small business fund.

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How to set up an emergency fund?

To set up an emergency fund for your small business, you will need a couple of things.
First, you need to look for a credit union or a bank with the best terms. Since you will
be using them in the future, it is good to familiarize yourself with how they operate and connect to important people.

The second step is to open either business savings or a money market account. This depends on the needs and nature of your small business. Once everything is set, you can start saving for the rainy days.

And remember the golden rule of an emergency fund; only use it when you must!

When to use an emergency fund?

You should only use an emergency fund if your income doesn’t meet the
requirements to reinvest and run the business. The current COVID-19 situation is
the best example of a downturn in revenue due to the economic crisis.

Furthermore, you could lose an important client that generated a lot of income or a key employee that contributed to your business earnings. Also, an unexpected lawsuit can have a tremendous impact on your financial resources.

A lawyer sitting at a desk in a courtroom, with a gavel in front of him
An unexpected lawsuit can quickly drain your company’s financial resources if you are unprepared for it.

Another situation where you can use the emergency fund is if you need to move your
business on short notice to a better location. Therefore, always look for affordable office movers like to minimize the need for the fund money.

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Alternatives to an emergency fund

Even though you can always set up an emergency fund for your small business, it does not hurt to look into other alternatives, like a bank credit or a business loan. Other

ideas that come to mind are to try and reduce your company expenses or form a
partnership with a strong company to cover funding loss.

All of the approaches are viable but remember not to make a rash decision without thinking it through. Good luck with your small business!