How Much Should You Pull From Emergency Savings When Your Business Needs Money?

You need to be careful when it comes to pumping money into your business.

Inflation has been surging for well over a year now. In January, the cost of consumer goods was up 6.4% on an annual basis. And while that's been hurting consumers, it's also been hurting small businesses.

If you're having a hard time covering the cost of running your business due to inflation, or due to another factor, then you may be thinking of dipping into your personal cash reserves to compensate. But is raiding your savings to help your business a good idea?

The danger of depleting your emergency fund

The whole point of having an emergency fund is to have a way to pay your bills when your income takes a hit, or to cover the cost of an unplanned expense your regular paycheck can't cover. But when you own a small business and it needs money, taking a withdrawal from your emergency fund could make sense.

After all, if your business doesn't succeed, your personal income will take a hit. So you basically have a choice -- take some funds from your personal savings so your business can keep generating a profit, or don't bail out your business and see your income decline, thereby necessitating an emergency fund withdrawal.

It's one of those "six of one, half a dozen of another" situations. And so if you need to take a withdrawal from your personal savings to keep your business running smoothly, so be it.

But depleting your emergency fund is a different story. If you have a $20,000 emergency fund and you take out $5,000 to help your business, that's one thing. But what you don't want to do is leave yourself with no money to fall back on.

If your business ends up folding completely, you might need your emergency cash reserves to pay your living expenses while you figure out your next move. And so you really can't afford to whittle your emergency fund down to $0.

Your business should have its own emergency fund

Your personal emergency fund is a cash source you can tap when you need money for various reasons. But just as it's important to have an emergency fund for yourself, so too should you make an effort to build one for your business.

Of course, if you're already in a situation where your business is hemorrhaging money or running into difficulties, then you may not have a near-term opportunity to build a small business emergency fund. But once things improve, make an effort to sock some earnings into a small business bank account and earmark that money for situations like the one you might be in now.

It's true that as a small business owner, you may be able to apply for a loan or line of credit if your venture needs a cash infusion. But doing that means signing up for debt, and that's not ideal. Do your best to build your small business its own emergency fund, and make sure to not withdraw too much cash from your personal emergency fund to bail your business out.