3 Reasons Why Business Owners Shouldn't Have An Emergency Fund (And What You Should Do Instead)
How Smart Business Owners Prepare for Emergencies Without Emergency Funds
Have you ever been told that you need an emergency fund and wondered how much cash is enough to keep aside in the business?
Me too.
In the last 20 years, I have:
Built 2 billion-dollar businesses
Built and sold 5 other companies, and
Invested in over 100+ deals.
To ensure maximum diversity in experience, I've also had some colossal failures!
During this time I experienced numerous emergencies including missing payroll, having the power turned off, and being evicted for being unable to pay rent. I wish none of those unfortunate experiences on anyone.
But going through all of those scenarios helped me realize that the traditional ideology of an emergency fund was fundamentally wrong.
Here's why.
Reason #1: When I was growing my business, I wished I could have used the cash instead of just saving it for a rainy day
I loved growing my business. I hated lazy cash.
I quit my job, borrowed money from my family, drove a dinky car and made so many more sacrifices so that I could deploy any and all cash into my business to grow it. Every time I logged into my bank account, I would see this emergency fund just sitting there gathering dust and I would get frustrated that I "could not" touch it.
I felt guilty for wanting to spend my own, hard-earned money to grow the business.
Reason #2: When I had an emergency, the amount I had saved was never enough
Emergencies don't come like drizzles. They come like avalanches.
If it was a drizzle, it wouldn't really be an emergency.
You don't get sued for $2,000, you get sued for $200,000. You don't get one flu in the office that sets you back, you get a pandemic. That is an emergency.
I had 90 days' worth of operating expenses in my emergency fund, but I always needed more than that to solve any true emergency that I faced.
The rest were just operational things that my business could handle.
Reason #3: When I was stressed, I didn't feel any better that I had the cash anyway
Like most entrepreneurs, I was stressed all the time.
When things were going well, I was stressed that I wasn't growing fast enough. When things were tough, I was stressed that I wasn't going to make it. It was truly the entrepreneur roller coaster. But at no point did having the emergency fund ever make me feel better in any way.
I honestly felt safer deploying the cash in my business than having it sit in a random account waiting for something terrible to happen.
Now, I am sure that there is a business owner somewhere in the world who felt saved by their emergency fund. However, the vast majority of business owners I know have shared these same feelings with me.
Which is why I am sharing them with you.
However, I promised you a solution to all of this, and it came when I got an accidental insight.
Everything changes when you understand this one thing: To prepare for an emergency, you don't always need the cash. You just need access to cash.
If something went wrong, and you were able to immediately access some emergency funds, would that make you feel better?
Of course it would.
Here are 4 ways to get access to cash in an emergency.
Way #1: Access Your Credit Cards
Forget Dave Ramsey for a second.
What if I told you that I used credit cards to float our working capital to make rent and payroll for many months?
Oh yeah. We grew that business 10x in 5 years to $3.4 billion in sales and sold it to Douglas Elliman.
Here is how you do it: Just go online to your credit card company, and figure out the process of borrowing from your credit card. If you're feeling brave, borrow $1,000 and then pay it back. That’s how you learn the process.
Congratulations! You have just activated your first access vehicle.
Way #2: Access Your HELOC
If you own a personal residence or a piece of real estate, you can get a home equity line of credit (HELOC).
Most gurus will poo-poo this, but this has saved me dozens of times because I am borrowing against my own asset. I currently own 3,000+ units of real estate. I have equity in all of those properties. The equity is locked up if I don’t create a vehicle to access it. It doesn’t matter if you have 3,000 properties or 3 properties, it’s smart to unlock your dead equity to work for you in an emergency.
To oversimplify here, you are borrowing against the equity in your home. I used this personally during various company building stages.
Here is how you set it up: Contact your current mortgage provider or a local mortgage lender and ask to set up a HELOC on your home. They'll walk you through the process and you can have it set up for a rainy day.
Remember: It is simple, but you have to set this up before you need it.
Way #3: Access Your Life Insurance
The Rockefellers used this method to build their generational empire.
It is the mechanism of using elegantly engineered cash-value life insurance as a cash flow vehicle.
Here's how I do it:
I have implemented the Infinite Banking Concept (IBC) for our family
Any personal liquidity that I get, I "shove" into my IBC system
Anytime I need cash, I just borrow against my policies. This lets my asset values grow while I borrow from myself
The process is so easy, I don't even have to talk to anyone. I just go online, and wire the money wherever I want.
Just to be clear: You will need a little time to set this up, so I recommend looking into it and seeing if an IBC-based cash flow system is the right fit for you.
Look, if it was good enough for the Rockefellers, I think it's probably worth looking into!
Way #4: Business Line of Credit
I recommend that every single entrepreneur get a business line of credit.
Here's how simple this is:
Start by going to your local bank (or wherever you already have accounts)
Ask to speak to a business banker
Explain that you are planning for the future and you would like to grow your business and that you are exploring a line of credit for the future
Explain to them that you have gotten offers from other banks (apply online and you can get these offers, don't lie) and you'd prefer to keep all your banking business in one place
They will ask you for your company documents, financial statements etc. and will then take you through the process
The best part is, you don't have to use it until you need it. But you also can't use it unless you set it up.
Here is my recommendation for you
If you already have an emergency fund, then I suggest turning on one of the above access-to-cash sources. Then at least you have the option to redeploy your "lazy cash" into growth capital if you so choose.
If you have never built an emergency fund, then I definitely recommend turning on one of the above access-to-cash sources to help you when you hit a rough spot or at least give you some peace of mind.
The shift from hoarding cash to accessing cash when needed has been one of the most liberating changes in how I think about business capital allocation.
Your emergency fund shouldn't be a brake on your growth.
It should be a bridge to your next level.
Man, Sharan!! This is so relieving. Every word you said about the business emergency fund is so true and relatable, word for word. I have always felt stressed despite having the emergency fund for months but with your advice, I am surely gonna see how I can activate any of the above options while also being careful about it at the same time. Thanks a ton!
Great insight. And so true. We're in the middle of an emergency, and part of me is kicking myself that I don't have more of an emergency fund available. But you're right, it wouldn't be enough.