The Importance of Building Capital Reserves for Small Businesses

Every successful small business leader has a few things in common. They’re goal-oriented, invested and determined. They’re willing (and able) to problem-solve. They care about the details. Those attributes come in handy for a key aspect of taking a business from the starting line to success: managing finances.   

As a small business owner, you might handle or oversee budgeting, billing, bookkeeping and balancing cashflow. If your business is built for stability and growth, you’re also making sure to build up adequate capital reserves.  

What are Capital Reserves?

If you’re a new or aspiring entrepreneur, here’s what to know about capital reserves: They’re a short-term safety net, essentially — funds you set aside for unexpected expenses or economic downturns that may affect your business.  

Your personal emergency fund and your business’ capital reserves serve a similar purpose. (Some people call capital reserves a business emergency fund.) You don’t dip into those reserves for regular expenses, but keep them aside for emergencies or investments. Forward-thinking small business owners build capital reserves to buffer against surprises and help keep the business stable. 

Generally, these funds are kept in a separate business account — like a Capital Reserve Savings account — to make sure it’s maintained and protected. 

How Much Money Should Small Businesses Keep in Capital Reserves?

Your capital reserves goal might differ depending on the size of your business, your industry and the level of risk associated with your work and your market. But experts do offer guidelines as a place to start. 

Most business advisors recommend saving at least three to six months of operating expenses in capital reserves. So, if your monthly expenses average out to $10,000, your capital reserves should be at least $30,000 to $60,000. 

If your industry is risky or seasonal, that goal may stretch. Some advisors recommend nine to 12 months of operating expenses in industries like construction and agriculture, which can be cyclical or harder to predict. 

Why are Capital Reserves Important?

Even the most organized and forward-thinking small business owner can’t control everything that affects the ups and downs of cashflow. And try as we might to avoid them, downs are common. In a 2022 Goldman Sachs survey, 90% of small business owners said outside economic factors were having a negative effect on their business. 

Capital reserves are a buffer against economic downturns, equipment failure, legal fees, natural disasters or staffing challenges. Having a healthy capital reserve can help your business weather any of those and avoid the need for high-interest borrowing. 

But that protection is just one benefit. Capital reserves can set the stage for growth, too. If you want to expand inventory or invest in new equipment, a healthy capital reserve can make that doable without added debt. 

Capital reserves also provide peace of mind. Running a small business is rewarding, but hard, and there’s comfort in feeling prepared for challenges. 

How Merchants & Marine Bank Can Help

Using a Capital Reserve Savings account with Merchants & Marine Bank makes maintaining a business emergency fund simple. It keeps your capital reserves safe, secure and FDIC-insured, but easily accessible when you need them. The minimum balance requirement is small, and the low monthly service charge is waived with a minimum daily balance. 

Community banks, by design, focus on working and lending within the communities we serve. So, by banking with a local community bank, you’re investing in the future of small businesses like yours.  

If you have questions or need to open an account, visit our team at the bank location closest to you, or contact Merchants & Marine Bank online.