Last update at October 25, 2020
You’ve been ruminating on the idea for months, likely even years. Working through all the details, the business plan has finally started to take some shape. You feel like you’re well on your way to that thing so many long after: being your own boss.
It’s an exciting and electrifying time, no doubt. The future seems bright and the potential appears limitless. However, it’s important to keep your feet on the ground and make sure you’re covering all your bases when dreaming of starting a business.
Starting and subsequently running a business takes a lot of time and careful planning. There will inevitably be a lot of moving parts and certain things that are specific to your niche. While it’s impossible to factor in every potential hiccup along your way, there are certain measures one can take to prepare for the inevitable.
Perhaps the most detrimental factor in starting a business comes down to money. Even the most careful budgeter may find themselves overwhelmed by the hidden costs of running a business. According to the Bureau of Labor Statistics, approximately 20% of new businesses go under in the first two years.
To excel where others have failed, new business owners need to be savvy as well as strategic when it comes to their operations. In this article, we’ll breakdown three of the biggest hidden costs you may come across when starting a business.
Unless you’re completely self-funding your business or have access to an interest-free source of capital, there’s a good chance you’ll have to take on some loans to realize your entrepreneurial dreams. The amount you’ll be able to generate and the general terms of payment and interest are dependent on your credit score. A higher score will naturally provide you with more agreeable terms and interest rates that don’t feel like robbery. On the flip side, a low score may not get you approved at all.
That interest rate can easily turn into a make or break situation if not planned for accordingly. Consider this scenario, if you’re saddled with hundreds or thousands in interest payments because of unfavorable terms, that can have a deleterious effect on your operation. Money that could be invested in the business, employees, or even your own paycheck, is instead going toward interest as well as repayment of the loan. If this seems like a lose-lose scenario, you’d be correct.
Instead, it’s wise to clean up and fix your credit score as much as possible before applying for any loan. Better yet, if your business idea isn’t wildly capital intensive, brainstorm some other ways to acquire the funding that doesn’t create those additional costs.
Better yet, if you have the opportunity to bring in outside capital to your entrepreneurial dreams, the better you’ll be in the long run. While finding investors may seem like a daunting task, in actuality, there are various ways to get others involved in your venture. You may consider the following options:
In reality, the topic of fees new businesses will encounter could fill it’s very own article. You don’t need us to tell you that fees are everywhere, that’s readily apparent in our day to day lives as it is. However, in the case of business, there’s another layer and level of fees that you’ll need to be aware of. To add fuel to the fire, some fees will present themselves as less obvious and, well, hidden.
First of all, regarding the aforementioned loans, make sure to dig deep and ensure you’re not getting taken advantage of by fees from those. Interest is unavoidable but fees on loans can range from an application fee to origination fees to late fees and more. Some loans even have prepayment fees. Imagine that, your business is living up to its potential, making more money than expected and in order to pay off your loan early…you’re saddled with a fee. There are a lot of fees just in the loan world that one needs to be privy to before proceeding.
Of course, loans aren’t the only place you’ll find fees.
Consider how people are going to be paying for your product or service. In this day and age, being a cash-only establishment isn’t really a thing you can get away with anymore. Customers expect the convenience of multiple payment methods and what is far and away one of the most popular ways to pay for anything these days? Credit cards.
And what comes with offering the ability to process payments that way? Yep, you guessed it, credit card processing fees. Regardless of the volume of payments you process, a portion of each transaction by credit card will have an associated fee. While these fees can range depending on your credit history, previous businesses, and business type, be sure to shop around for the best rates and pricing for payment processing.
Aside from the fees associated with accepting credit cards, you may have professional fees like bookkeeping or legal fees or permit fees, etc.. These can all add up quickly and are hiding right in the open. Being vigilant on your monthly statements and user agreements will prevent you from being swept up in a sales pitch.
Unless you’re running your business as a true sole proprietorship, chances are you’ll have some employees to think about and it’s not just their salaries that need consideration. As vital as they are to your operation, making sure you truly understand the true cost of employees will help guarantee not only that you can afford them but that you’re able to treat them fairly and do right by them. Which in turn yields better results and more productivity. After all, happy employees result in a better work ethic and satisfaction in the workplace.
Unfortunately, as the provider for your employees, there may be more than meets the eye. The hidden costs regarding employees are things like health insurance, the cost of training and certification in some cases, and finally getting them up to speed (particularly important if your business has high turnover). Not to mention the money you’ll shell out on other benefits to make sure they’re doing the best work possible, i.e. office perks, bonuses, etc.. And the cherry on top of all of these considerations is the associated taxes that come along for the ride.
Without taking into account all of the costs that are outside of a salary, you could find yourself in some dire straits because these are by no means insignificant numbers.
Depending on your state, there may be employee restrictions, allowances, and minimum wage standards that you’ll need to account for. Labor laws are set in place to protect employees and business owners alike, so be sure to consult them to understand what your workforce will need to accommodate.
For better or worse, many of these fees are just the costs of doing business. Sure, you may be able to avoid some or mitigate others but the most important thing is to have an awareness that hidden costs are out there and to be vigilant in at least understanding and accounting for them if you can’t completely avoid all of them. The more cognizant you are of hidden fees and costs in starting a business the better you will be at keeping your doors open and making the most of your vision.
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