5 Hidden Costs of Running a Small Business

543,000 small businesses are founded each month in the United States. While opening a new business is exciting, getting started can be more challenging than expected. In fact, only 50% of small businesses survive after 5+ years. Meanwhile, only a third will make it past the 10-year mark.

To successfully manage a small business, be sure to calculate the actual costs of running a business. Too often, small businesses won’t consider the hidden costs of loans, licenses and legal paperwork, insurance, office and retail space, and employee benefits. This article highlights the top 5 hidden costs of running a small business. Find out how you can minimize these expenses to grow your business.

Importance of identifying hidden costs

Starting a small business already has huge outright costs. Most small businesses spend $2,000 to $5,000 before they can take off.

You’ve already allocated your budget to buy new inventory, hire staff, purchase equipment, set up your website, and/or rent out retail space. However, if you fail to take account of hidden costs, it will be harder for you to pay for necessary expenses. Identifying all hidden costs of running your business will help you calculate your profit margins and pricing. With the odds stacked against the survival of small businesses, it’s critical that you accurately identify the costs of running your business.

Loans

You’ll need funding to launch your business. Most business owners will rely on bank loans to get their money.

Lenders look at your personal or business credit scores before approving the loan. If your credit score is bad, you’ll get less than favorable repayment options.

Aside from your outstanding capital, remember that you need to pay for the loan interest at some point. Especially if you cannot make payments on time, your compounded interest will hike up. This will make it even harder for you to launch your business.

To reduce loan fees, try these strategies:

  • Save your own money before launching your business
  • Crowdfund from your friends, family, and supporters
  • Improve your personal and business credit scores to get favorable loan terms
  • Create a list of alternative lenders and compare their rates
  • Settle other high-interest loans and credit cards to reduce your outstanding interest

Licenses and legal paperwork

Different states and cities will require different licenses and permit processes to begin business operations. The required fees will also vary depending on the type of business you plan to operate (partnership, nonprofit, corporation, or limited liability company).

Depending on local regulations, you may also need additional licenses and fees to sell certain products (such as alcoholic beverages). You may also be required to get a permit for operating an oversized business vehicle.

Your business may need a lawyer for many business licenses, contracts, and legal disclaimers. Another significant hidden cost is litigation. According to the National Federation of Independent Business, small businesses are often the target of lawsuits. This is because small businesses are more likely to settle than pursue legal action.

Filing a business report annually or bi-annually will require additional fees. To reduce the license and compliance costs, try these strategies:

  • Invest in an online business formation service to minimize the costs of paying for individual professional services
  • Research the required permits and licenses for your state and type of business.
  • Check the requirements, deadlines, and frequency of filing business reports.

Insurance

Consider the multiple types of business insurance you need to get. These include general liability, commercial property, commercial auto, professional liability, and unemployment. In some cases, you may get full business coverage for all of these insurance plans to save money. Always research the required insurance policies for running a business in your state.

Home-based businesses need to get home-based insurance in addition to their homeowners’ insurance policy. If your small business has employees, you may need workers’ compensation insurance.

To reduce insurance hidden costs, try these strategies:

  • Talk to an insurance agent that specializes in small businesses
  • Get an insurance bundle for businesses

Office / retail space

Renting or purchasing properties for your office or retail space entails several hidden fees. You don’t just pay for the space itself- you are paying for a real estate agent, utility bills (electricity, water, internet access), office equipment, receptionist services, arranging meeting spaces, etc.

Consider if your business really requires an office or retail space. A work-from-home setup or a temporary office space may be enough for your current business operations.

To reduce office/retail space hidden costs, try these strategies:

  • Weigh the pros and cons of a work-from-home setup vs. an office setup
  • Ensure that your leased space covers the cost of utilities
  • Look for utility providers that offer competitive rates and energy-efficient audit programs to reduce costs

Employee benefits

As the employer, you need to look into financing your employee’s salaries, payroll taxes, and benefits. While other employee benefits might seem optional, failing to get these benefits for your employees will result in high employee turnover:

  • Paid sick, vacation, and maternity leaves
  • Office perks and a comfortable work environment
  • Certifications, training programs, classes, and conferences

High employee turnover means higher expenses for training and hiring. It will also result in productivity and knowledge loss.

To reduce employee costs, try these strategies:

  • Provide regular perks that will boost employee retention
  • Negotiate with your insurance provider

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