Running a business isn’t a piece of cake. In addition to what your calculated budget is, you should also take in consideration some hidden costs. If you are not prepared and careful enough, these hidden costs can run your startups or business to the grounds.
Start up costs have skyrocketed over the years. Start up costs can easily pile up. It’s easy to be befuddled by the real estate, website development, initial inventory, opening promotions costs.
So before you go to your boss to quit your job and startup a new business, take a look at these points to really understand the hidden cost of running a business.
Loan interest is another hidden costs of running a business:
To start up a business you need funding. To get funds entrepreneurs often get loans from a bank or other lenders. But if you are just starting out with no business experience, then it will be quite difficult to get a loan. In fact, you are lucky, if you get a loan at all.
With no business experience or an established company with the revenue documents, then your loan will depend on your personal financial situation. And if you have a bad credit score, you can only expect to get a loan with a bad payment term.
Out of desperation young startups agree to all conditions only to fall into the trap of starting a debt cycle. With a bad term, you will have to pay a lot in interest, leaving you with only a little money to work with. This way you will be forced to overdraft as you won’t be able to pay off your loan on time.
This will drag your credit score down, leaving a little chance of ever getting approved to get a loan in the future. So if you are just starting out a business, then be aware of this hidden cost of loan interest.
Another start up cost is Insurance:
When you are just starting you might not need a lot of insurance. But as time passes by, you will need to pay for a lot of insurance to protect your business. Such as,
- General small business insurance
- Liability insurance
- Worker’s compensation insurance
- Property insurance
- Cyber insurance
- Errors and omission insurance
- Commercial auto insurance
- Unemployment insurance
Choosing how much to spend on insurance can be a bit confusing. It mostly depends on what types of business you operate, how big your business is, revenue, location, previous issues, current risk factors, number of employees and industry. To keep up with these policies, $1000 a year on each policy will be spent.
If you are operating your business on a tight budget, then paying for all these insurance will only put you in a tighter position. However, you must be prepared for a rainy day. Many young businesses have been washed up by a disaster that financially broke them.
Insurance like property insurance or liability insurance is vital for small businesses. If a fire breaks out or your water pipeline gets licked or a tornado destroys your avenue or even if you get robbed then your property insurance can save your business.
If your business gets sued by someone for selling a faulty product or any other reason then your liability insurance will pay a large settlement that you won’t be able to pay. In some states, unemployment insurance is required.
Talk to an insurance agent who is willing to get to know your business and your financial ability to find you the most suitable insurances. An insurance agent who specializes in small business or startups can find your insurance policies with the best rates.
Taxes is also another hidden cost of running a business:
People with jobs don’t need to worry about taxes. It is because mostly your fair share of taxes was paid automatically by the payroll department. The company you work for probably covered part of your bill. But when you are a business owner, you will have to pay self-employment tax.
Self-employment tax is a big deal. Even if you are not making a lot of money, you still owe something to your government. Not paying taxes is considered a crime in most of the states. You might think that you won’t have to pay a significant amount until you make a marginal profit. But that is only possible if a sales or income tax is imposed on you. However, that cannot always be the case. It depends on the size of the business you are operating or the nature of your business.
If you earn more than $400 a year then you will be imposed with 12.4% of your wages for Social Security tax and 2.9% of your wage for Medical Tax. So in total, 15.3% of your wage will have to pay self-employment tax.
Legal fees is also another start up cost:
Legal fees are considered the number one hidden cost for running a business. Small business owners are more likely to settle a case than litigate than any large corporation. And the trial lawyers understand this weakness, so small business owners are the main target of the lawsuits. In most cases, the settlements are between $1000 to $5000 depending on the case. Even if you settle a suit, your insurance premium rises which drives up the costs.
Even after running your business with ease for years, you should leave some important aspects of operating your business to other professionals. Ask the experts in your team to help you with legal and financial obligations.
With time, you will notice that legal and accounting fees quickly add up. Take advice from your lawyers and accountants to make the best choice for your business. Without their professional service, you might end up making the wrong and uninformed decision for your business.
Credit card fees can also be considered a start up cost:
When you let your customers pay you with credit cards, they can make a larger purchase. Thus, you get more revenue. But offering your customers to make payment with credit cards can increase your costs. Credit cards company charges a fee for every transaction you make. The terms and fees vary from companies to companies. Research the company’s terms and fees before you make a decision.
To offer your clientele pay you with credit cards, you will need to set up a merchant account through your bank. When the application process is completed then you will be approved to accept huge credit cards payments. Then your banks will allow you to buy or lease credit cards equipment. You can get an online payment processor if you want to run your business online.
Permits and licenses are another hidden cost of running a business:
To make your startup or business considered legal, you need to apply for various permits and licenses depending on what product or service you sell and what industry you work in. Many start their business without knowing this legal stuff and find themselves in trouble. Many states consider operating a business without permits or license to be a criminal offense.
No matter what type of business you start, you will always need some kind of permits or licenses. For example, you need to apply for zoning or land use permits so that your federal government or state government can check if you have enough parking area around your business’s location. Contact your state department to know the specific requirements.
The types of business you run will also play a role in what type of permits or license should you be applying for. You need to take into consideration the permit fees and charges. Most of the time, business owners need to renew their permits or licenses.
Another start up cost is employee benefits and perks:
When calculating the amount you will pay your employee, take some factors like taxes, benefits and perks into consideration. Otherwise, you will get yourself in a tighter position for being uninformed.
According to research, the overall costs run from 1.25 to 1.4 times the basic pay. Employment taxes, healthcare benefits, retirement benefits, vacation benefits and worker’s compensation increases the costs. The research also states that a $50,000 salary can cost up to $70,000. What you are expected to pay can be enough reason to run your business to the grounds.
Administration cost is also considered a hidden cost of running a business:
When you had a job, few things were taken care of for you. So you might not have any clue about these costs. But if you are starting up your business then you need to take care of the administration costs. Such as,
- Filing cabinet
- Paper clips
Although they don’t cost as much as you think, over the years they will add up to a lot of money. So when you are making a budget for your startup costs, take these costs into consideration.
It takes money to make money. Which means you need money to generate more money. But you must know how to manage your money and how to spend it wisely to establish your business. Many entrepreneurs get trapped in debt and hit the bottom line.
So whether you are just starting your own business or thinking about expanding your business, consider these hidden costs. As unmotivating as it may sound, it’s better to be prepared than finding yourself in debt.