The Hidden Costs of Starting a Small Business

Starting a new business is exciting … and expensive. A Babson College report found the median initial funding requirements to start a business topped $88,500 — and 95 percent of entrepreneurs use personal funds to cover those costs.

You created a budget and thought through all of the costs you might incur when financing a new business, including renting and renovating the perfect storefront or office, purchasing furniture and supplies, advertising and salaries. Even the most meticulous entrepreneurs forget about these seven essential (and often overlooked) startup costs.

1. Permits and licenses: You might need a permit to renovate a storefront or sell alcohol in a restaurant and licenses to sell stocks or start a nail salon; some cities even require business licenses for sole proprietors working from home. Be sure to check with local, state and federal agencies about the permits and licenses that are required to operate a business in your area.

2. Staff extras: Although salaries are the biggest expense associated with hiring staff, the cost of benefits adds up and might not be factored into your budget calculations. The costs of workers compensation insurance, employment taxes, healthcare and paid vacations can add about 20 percent of the employee’s base salary.

3. Insurance: A business needs to be protected. While there are no standard costs for business insurance, the U.S. Small Business Administration estimates that annual premiums for general liability insurance range from $750 to $2,000. You might also need property insurance, product insurance and errors and omissions coverage. Talk to your Farm Bureau agent about the cost of comprehensive coverage for your specific business.

4. Professional services: Engaging the services of legal and financial professionals is essential for startup success. A lawyer can help you determine the right business structure, set up entities such as an LLC, S-Corp or C-Corp, navigate red tape and make sure all operations are within the letter of the law. An accountant can maintain payment records, find (and claim) deductions and ensure all of the right forms are filed with the IRS.

5. Memberships: Belonging to industry associations or local chambers of commerce can help with networking and professional development but membership comes at a cost. Consider the dues important to startup costs but review your memberships annually and only renew those that are providing ROI. 

6. Merchant fees: In 2016, the number of debit card transactions reached almost 70 billion, representing $2.56 trillion in charges. Banks and card issuers charge merchant fees to process these transactions and those fees, which range from 1.43 to 3.5 percent, can take a bite out of the bottom line. Since paying with plastic is so prevalent, these fees must be considered part of the cost of doing business and should be included in the budget.

7. Repairs: When the copier breaks, computer software needs to be upgraded, or the toilet overflows, calling in a pro to make repairs or replacement equipment might not be in the budget. In addition to adding a line item to the budget to account for unexpected repairs, remember to save receipts to deduct these expenses on your business tax returns.

Taking these hidden costs into account when starting a new business will help you better balance your budget and plan for startup success. Make financing your startup business easier and talk to one of our professionals at Farm Bureau Financial Services today.