The movie Sex and the City is one of my favorite movies. Without giving away the plot, one of the many lessons of the movie, was when to make decisions based on emotion and when to make them based on logic. Both elements are necessary for the most effective decision making. With my analytical background, I often make decisions based on logic. A pros and cons list is often the favorite tool in my arsenal. However, I realized that everyone is different and responds to different triggers. So in this article, in discussing how to have an emergency fund for your business, there is a clearly logical argument for it. But, I also want to present the emotional element to incite action and to really drive the point home. How will you handle an emergency?

Logic: If your son or daughter came to you and said they wanted to major in "Underwater Basket Weaving", how would you respond? If you are like most parents, you would tell them to follow their passion, even if there isn't a job market for an underwater basket weaver. But before you go out and buy them a snorkel, you would suggest than they have a back up plan and get a minor in something like accounting. However, if I were to ask you if you had a financial backup plan for your business, I would probably be on the receiving end of a blank stare. For most people, the back up plan for an emergency, would be your insurance plan. However, it can take while to receive insurance proceeds, so what would you do in the meantime. Because as Bob Hope says "A bank is a place that will lend you money if you can prove that you don't need it". After the emergency happens, it will be hard to get access to cash, so you need to set it up before things go awry.

Emotion: Imagine that despite offering the best product or service you can possibly offer, you have a disgruntled customer (We've all been there.) This person then proceeds to bad-mouth you all over the community. You walk into your local coffee shop on Monday morning and it seems like everyone is whispering. You go and pick up the newspaper and see that there is a very unflattering article about your company and you know the "source" of the article is the disgruntled customer. You go into the office and suddenly your phone isn't ringing like it usually and your e-mail inbox is surprisingly light. A month later, your revenues have plunged 50%. You can't believe that a simple misunderstanding has tarnished your reputation and may even cost you the business you have spent years building. You have developed a strategy to correct the bad publicity, but it won't be business as usual for at least two more months. Do you have enough cash to sustain you through your turn around strategy? This example may seem far-fetched, but may I remind you of Firestone and the massive tire recall?

3 Ways to Finance an Emergency

There are three ways that will allow you to access cash in an emergency: Assets, Debt, and Equity.

1. Assets

This consists of assets already in the business. Cash and investments. Do you have enough cash in the bank to run the business in the wake of an emergency? Accounts Receivable. Do you have a accounts receivable to sell to a factoring company? For example, if you have an accounts receivable balance of $10,000, you could sell it to a factoring company for a 75% discount or $7,500. Fixed Assets. Do you have machinery you could sell? Do you have a building you could rent or sell?

2. Debt

A line of credit at the bank. Generally you would pay a fee or a percentage of the commitment to have this available at all times. This option is my personal favorite. A credit card. For smaller businesses, they may be able to finance business expenses for several months on a large balance credit card.

3. Equity

Ownership contributions. Do the owners of the company have enough personal liquidity to sustain the business in tough times?

Bringing in another partner. Is there someone outside of the company who expressed interest in purchasing a piece of the company or in becoming a partner.

Copyright (c) 2009 Aisha Jones Scheffel