When an unexpected expense arises for your business, deciding how to cover it can be difficult. What expenses should you cover with your emergency fund, and when should you take out a business loan? The answer might be a little easier than you think.
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Using your business emergency fund first
The money saved in your business emergency fund should be used first to pay for any unexpected expenses. This money will save you from having to take on more debt to cover these expenses. It will also be possible to take steps to rebuild or replace the money you have used from this fund. This will be easier to manage than a loan payment from a small business lender.
Keeping your small business emergency fund in a high-yield savings account will help you grow the account quickly due to the favorable interest rates associated with these accounts. The interest rates will not put a significant amount more in your account, but they are much higher than a traditional business checking account.
What qualifies as an emergency?
In some cases, dictating what an emergency is will be easy, but not every emergency will be clear. It may depend on your ability to repay the money you use from your fund. If you can replace the money from revenue, using your emergency fund is an easy decision. If it is more than you can replace quickly, it becomes a difficult decision.
Here are a few examples of when to use your emergency fund:
High Turnover
If your business has trouble keeping employees in this market, it can start to pinch your pockets. The cost of training people can lead to a loss of revenue, especially if your business has a higher curve for proficiency.
To keep pace with your customers or the competition, you may need to use emergency savings to seek whatever assistance is available to you.
As you work through these hiring ups-and-down, you should focus at this time on reducing expenses to only the essentials. After those funds are depleted, it will be necessary to use any emergency funds to cover these business essentials.
Home and auto repairs
Any impact to a business fleet can be a major setback for a small business. Without the savings to cover even a minor auto repair, it can result in a significant burden if you are forced to use a credit card or loan to cover the expenses. Using an emergency fund in these instances will be extremely valuable, even if you can only cover part of the costs.
Emergency savings should not be used on cosmetic expenses or unnecessary work. Using your emergency fund when not necessary may leave you with a financial burden if an emergency arises before you can replace the funds. You do not want to have to assume a debt that an emergency fund should have been able to cover.
Medical Bills
It may be challenging to predict medical expenses, and even with insurance, you can be left owing a significant amount for treatment. A savings plan to cover these expenses will help reduce the added stress when these payments are due, and also keep your business healthy when you are maybe not at your best.
Using your savings to cover medical expenses makes sound financial sense. Moreover, covering these expenses without the added costs of loans will be a significant financial saving over the stresses of a loan and additional payments.
Using a personal loan
If you do not have an emergency fund, or your emergency fund isn’t sufficient to cover the unexpected expense, one of your options is to obtain a personal loan to cover expenses. A personal loan would be preferred overusing your business credit card as it carries a much lower interest and will be a more affordable opportunity.
You may also decide to obtain a loan instead of savings if you do not want to use a significant portion of your savings. This will depend on how comfortable you are in using a significant portion of your savings and how much time it will take you to replace the savings you need.
For large expenses, such as home improvements, weddings, and vehicle purchases, a personal loan may be the best and only option. Different lenders have different loan limits and repayment plans. For example, in Ohio you can borrow up to $1,500 from a lenders like SimpleFastLoans. However, in New Mexico, you can only borrow up to $1,250.
Taking out a loan can have a positive impact on your credit score. It can add diversity to your credit accounts, affecting 10% of your credit score. However, the impact it will have is based on your credit profile and might lower your score due to the number of inquiries during the loan process or if you have excessive credit with your income.
Conclusion
If you can promptly repay the needed amount, you should utilize your emergency fund for unexpected expenses. This will make the best financial sense and prevent you from acquiring additional expenses and costs associated with a loan. Emergency funds can also be used for business opportunities and investments to grow your money further.
If the emergency fund is insufficient to cover the entire cost, taking a personal loan to cover it will be the next best option. This could improve your overall credit score and help diversify your credit accounts. However, if you already have an excessive amount of credit, this will negatively impact your credit score in the future.
