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The Hidden Costs of Launching a Startup

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Starting a business comes with a lot of challenges. Competition is hard in any market. It is hard to stand out even with the most innovating marketing efforts.  The saying “You have got to spend money to make money.”, is now truer more than ever.

Even if you have done all the calculation before starting your business and have a solid business plan, there are still costs that may and will sneak up on you. Small fees and unexpected expenses pile up and bite more out of your budget than you could ever imagine.

Here are a couple of expenses that often get overlooked.

Taxes

You have probably figured out that you are going to have to pay some taxes, but most new entrepreneurs are surprised with how much they have to pay, especially if the startup is not making any money and the owners assume this means no taxes as well.

This is not always true – some taxes are not based on revenue. It is also important to have in mind how you set up your business because the rules are different for LLCs. If your company hires outside contractors, you will not have to pay for them, but for maintaining their W-9 forms.

Credit Card Fees

If your business accepts credit cards, you do not get to keep all the profit that you generate from them. Credit card companies take about 3 percent for setting up and operating the terminals. This may not seem like plenty but it makes a dent in your overall profits if you probably did not take this expense into account in the first place.

Do a little research beforehand and find out which company has the smallest fees. Also, always offer a discount for cash payments to encourage customers to use cash. You can always add the fee to your prices, but that will obviously mean higher prices which is not something customers like to hear.

Insurance

The government requires business in certain industries to issue surety bonds. These bonds are often misunderstood, even by those who use them and pay for them. In essence, surety bonds are paid in advance to the third party as insurance for your customers that your business will uphold certain deals and promises.

If you do not play by the rules, the third party pays the customer. Most business owners are not aware that such insurance even exists and it’s sometimes hard to know how large the expense is (because it depends on many variables, like the number of clients and the overall credit score).

Shrinkage

Shrinkage is a reduction in inventory. There are lots of reasons why this occurs, but theft is the first one that comes to mind. Employees take small things thinking that no one will notice (office supplies that lay around it storage). A lot of items get lost or destroyed during shipping as well.

This may seem like an insignificant expense, but it adds up. There are ways to prevent shrinkage as much as possible – for instance, have a strict policy about theft. You can also organize training for new employees that will emphasize the care with which packages should be treated.

Permits and Licences

Permits and licenses are necessary for almost any business. Most of them are obtained from the local authorities. These will cost you time, first and foremost, because applying for a license takes quite a bit of paperwork. Also, most of the licenses also come with fees.

It is important to figure out when they expire as well as when to renew them. Membership in certain professional networks is also necessary and usually not free of charge. Once you become a member of these groups, use them as much as you can. Most of them offer a variety of perks, discounts, free courses and so on. 

All of these expenses may seem insignificant, but together they can really hurt a startup. Talk to your lawyers and accounts and do not forget that the devil is in the details.

  • Raviraj

    Oscar good write up.

    Yeap, most of the novice entrepreneurs never calculate all these hidden costs. Thanks for pointing all of us in the right direction.

    Btw, here’s a great article on prevention of inventory shrinkage (https://emergeapp.net/inventory-reports/inventory-shrinkage/). Its a good addition to your blog.

    Best,
    Raviraj

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