As a business owner, days, months and even years can go by without the need to access emergency funds to keep your enterprise afloat. However, the time will inevitably come when circumstances require that you dip into a pot of cash that you do not readily have on hand. By knowing your options and planning in advance, you can get your needs met much more smoothly.
Invest in Your Own Future
Running a business can often feel like a hand-to-mouth operation in which you spend money as fast as it comes in. When this is occurring, it is incredibly difficult to find the discipline to put dollars aside in an emergency fund. However, doing so at even the lowest level can add up over time and may ultimately save you from needing to resort to more extreme measures. The key to this strategy is deciding what percentage of your profits you can put aside and then doing your best to stick to your resolution.
Solicit Interested Investors
When you experience an unanticipated and urgent need for cash to keep the daily operations of your business afloat, one option is to ask family members, friends and other interested parties who might be willing to lend you the money you need. Unfortunately, many entrepreneurs do not have a ready supply of such cash cows.
Even if you do, be very wary of becoming entangled in financial obligations to relatives and friends. Nothing can tarnish a relationship faster than tensions over money. Therefore, use this option only if you have no other valid choices.
Take Out a Business Loan
In spite of your best efforts to save cash over time, you may still find yourself in need of emergency funds at some point in the lifetime of your business. When that happens, one of your first ideas will probably be to take out a traditional business loan.
Most likely, you are familiar with how this type of arrangement works: You go through an application process with a financial institution. If you are approved for the loan, you begin paying it back at predetermined intervals. In addition to paying back what you borrowed, you are also responsible for interest charges until you are finished paying. Should you have the means to pay back the entirety of the loan early, you might also be assessed a prepayment penalty.
Apply for a Business Line of Credit
On the surface, a business line of credit resembles a loan. You approach a potential lender and request a specific amount of money, usually being asked to provide evidence of your credit history and other relevant factors. As with a loan, your application can be either declined or approved.
The difference between these two financial arrangements becomes apparent after you are approved. Once accepted, you are given access to a set amount of funds that you can use at your discretion. You only pay for the amount of money you actually use plus interest charges. As long as you continue to pay down your debt, a business line of credit will be constantly refreshed, giving you ongoing access to a revolving amount of money.
One note of caution: Before signing on the dotted line for a business line of credit, be sure that the financial institution or merchant account services provider will not charge you non-use or monthly maintenance fees that could make you pay up front for cash that you never actually use.
Obtain a Business Credit Card
Many entrepreneurs fall into the trap of using their personal credit cards to cover the expenses that suddenly arise when an emergency occurs. This can lead to chaos and confusion in your bookkeeping as well as added angst when tax time comes. Instead of using your own personal plastic, consider getting a business credit card.
Like a line of credit, this is a revolving arrangement in which you only pay charges for the portion of the full amount of funds that you are actually using. With both business lines of credit and credit cards, you can actually use them to raise your credit score and enhance your profile. Over time, this can make applying for business loans easier and less costly in the future.
Get a Cash Advance
If your business accepts credit cards or has other payment streams, you might also consider asking your merchant account services provider for a cash advance. This is not a loan; instead, this type of financial arrangement is based on your future credit card revenues. In effect, you are selling a portion of your future profits to the lender in exchange for cash on hand right now.
Cash advances often come with fees that are higher than what you would find in a traditional business loan. However, they are frequently available to entrepreneurs who would be rejected for a traditional business loan. If you decide to take this course, be sure you have a thorough understanding of all the fees you will be charged in order to determine if this option is a sound financial move.
As is the case with so many other aspects of running a business, preparation and preemptive action are excellent strategies to adopt when contemplating how you will obtain cash in an emergency. Take time now when conditions are stable to map out your plans of what you will do should the worst happen. Then, if it does, you can act decisively in the knowledge that you have previewed all of your options and set the best course.