The Best Ways to Deal with a Financial Emergency As an Entrepreneur
Financial emergencies have the potential to ruin your business if you aren’t careful. Though the failure rate for startups is often exaggerated, it’s still relatively high: 20 percent of businesses fail within the first year, and about half of U.S. businesses fail within five years, according to data from the Bureau of Labor Statistics.
Most of these failures are the result of a complex sequence of factors, as startup entrepreneurs explained in their business post-mortems. Those factors include a lack of market need, an inappropriate team or heavy competition.
Then there's running out of cash, the second-most-cited factor in these post-mortems -- with 29 percent of companies having claimed to experience it before failing. An unexpected expense or sudden cost increase is often responsible for the shortfall, and it may well be the final breaking point for a business that’s already struggling.
So, what’s the right way to deal with a financial emergency as an entrepreneur? Consider these past examples of well-known startups that almost failed due to financial emergencies -- but ended up recovering:
Within the first two years of starting FedEx, founder Frederick Smith found his company so many millions of dollars in debt, because of sharply rising fuel costs, that he was nearly ready to declare bankruptcy. When FedEx's cash reserves had been depleted to just $5,000, the company started asking pilots to use their personal credit cards and uncashed paychecks to fuel their planes.
It was at this point that Smith gambled the last of the company’s savings on blackjack -- which is true. But the real saving grace was an additional $11 million in funding and a brand-new advertising campaign.
2. Tesla and SpaceX
Two of the most curious and innovative tech companies in the country, both started by Elon Musk, almost faced collapse in the wake of the 2008 economic recession.
Musk himself told Bloomberg that he had the money to keep one company afloat, but certainly not both. Then a combination of factors allowed him to keep both businesses in operation; for starters, he sold off some of his investments and asked Tesla investors for more funds. But the biggest path forward? A new $1.6 billion contract from NASA, which kept SpaceX not only alive but thriving.
Apple was a company founded on innovation. But that innovation disappeared as Apple began to age without the leadership of visionary Steve Jobs. After a series of failed products, tough financial circumstances and apparently no ideas of how to become a dominant tech force again, the company reinstated Jobs and made it his mission to restore the innovation that had made the company succeed in its earliest stages.
A few years later, Apple introduced the iPod, the iTunes store and, eventually, the iPhone, all of which helped to take Apple from a barely stable, once-successful company to a new kind of tech giant.
Kodak never relived its truest glory days as a photography giant, but after filing for bankruptcy in 2012 (in the wake of the digital photography revolution), it saw a decent recovery.
A thorough corporate reorganization and a renewed focus on business-imaging needs kept the company from repeating its mistakes and gave it a fighting chance for success in the modern digital era. Profits and growth remain thin, but the company has weathered a storm that could have financially destroyed it.
These entrepreneurs and brands took drastic measures to save money, even asking employees for sacrifices, pushing hard for new funding and radically reinventing their companies.
You, too, can prepare for a financial emergency in advance by maintaining an emergency fund for your business, just as you would for your personal finances. If you have enough cash, you can set it aside; and, if not, you can open a business line of credit so you always have funds to tap into.