A new report shows that millions of small businesses are risking it all by failing to set up an adequate emergency fund.
Leading invoice funding company Charter Capital says millions of small businesses across America are shortchanging themselves and putting their companies at risk by failing to set up a proper emergency fund.
Although able to address their daily needs, businesses in this situation are often unable to cope with unexpected lulls and emergencies, which can hinder long-term growth and ultimately result in closure.
The company draws on research from JP Morgan that shows one in four small businesses has less than a 13-day cash reserve buffer. Those in low-wage or labor-intensive industries often fare worse than their counterparts, as it’s much harder for them to build cash reserves.
Failing to create an emergency fund is especially risky, given that 82% of business failures are linked to cash flow issues, per National Federation of Independent Business (NFIB) research.
“Businesses can be perfectly able to manage day-to-day expenses and even be profitable but still face difficulties when an emergency hits,” explains Joel Rosenthal, Co-founder and Executive Manager at Charter Capital.
“Even if the business can cover the emergency expense, it’s often at the cost of something else, such as marketing or seizing business opportunities, which can stall growth in the long run.”
Rosenthal says that small business owners in need of a quick cash injection will often accept terms that aren’t in the best interests of the company to make ends meet, which adds to the burden.
Not only is money immediately being funneled away from growth opportunities, but the business is then paying exorbitant fees and interest that set it back further.
“Businesses should have three to six months of expenses set aside in an emergency fund,” Rosenthal continues. “This should be separate from daily working capital, regular savings, and the business owner’s personal funds.”
Because it can take years to build up an adequate emergency fund, Rosenthal recommends that businesses also plan ahead and have a source of emergency funding ready. Invoice factoring, he says, is ideal because it accelerates cash flow and doesn’t require ongoing payments or going into debt.
The full report can be found on charcap.com.