The Hidden Cost of Starting a Small Business

Have you ever had that eureka moment—the little lightbulb going off in your head that signals a great business idea?

Some people might dismiss their idea almost immediately, thinking that getting from A (the idea) to B (the market) would be an increasingly uphill task strewn with hurdles.

It’s true: one of the biggest challenges of starting your own business is the cost. But that shouldn’t put you off. If you think your idea is viable, then your next step should be to explore the potential costs of your new venture.

According to Shopify, the average costs in the first year of business can be around US$40,000. But keep in mind that the cost of starting a small business can vary greatly and will very much depend on what your business idea is.

For example, developing an electric 4x4 vehicle will cost you far more than starting a small ecommerce business that only offers a limited amount of products.

Some costs may seem obvious, even to new entrepreneurs. But it’s vital to understand every cost you may come across in bringing your idea to fruition. After all, it could be the difference between success and failure. Knowing what it takes to start your business and keep it running is crucial.

In this article, we’ll explore the hidden costs that you should be aware of and how to prepare for them.

Startup costs

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When you kick off your business plan, the first thing you need to think about is what your startup costs will be.

Of course, this cost will depend on what your business is going to be. You could start an ecommerce business on a minimal budget, but launching a manufacturing business will cost you a lot more.

So what are the main things to consider when it comes to startup costs?

• Location: A small ecommerce business could be run from your garage or spare room, so your real estate costs would be very low (unless you need to install any special storage facilities). If you’re not running a business from home, then you need to consider rental cost (or outright purchase) as well as any initial deposit required for your space.
• Research: Before you try and take your idea to market, you will want to research any potential competitors and how viable your idea is. Of course, you can keep costs at this stage down by conducting market research yourself via social media or even personal interviews.
• Legal requirements: Costs in this area can vary according to business type and location. You must investigate whether you need any special licenses or permits to operate your business, health and safety certifications, or insurance that is needed to cover both your business and your employees.
• Equipment: Again, this can vary greatly according to business type. At the very least, you might need some computers/laptops. But you may need to buy specialized machinery if you are doing any sort of manufacturing. You can also decide whether to buy or lease this equipment, though the latter may be a more expensive choice.

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• Technology: Another cost that will vary according to your needs is the tech you utilize. You will likely need a website developed and you may require specialist software such as a virtual phone number or accounting software. You may consider outsourcing some services such as accounting if it is a cheaper alternative to doing in-house.
• Staff: You may feel that you don’t need staff initially if you can run the startup stages yourself. However, if you do need some employees, then you should budget for salaries for those staff as well as any additional benefits such as health insurance.
• Advertising and promotion: If nobody knows about your business, then how do you attract customers? It goes without saying that you must set aside a budget for promoting your company. That could include hiring a marketing team or outsourcing to a specialist agency. Looking at different options can help control your advertising budget. Utilizing social media to launch a product can also be a very cost-effective tactic.
• Stock: If your business model is some form of retail, then you need actual products to sell. One way to save on stock cost is to approach wholesalers about getting goods on consignment. This way you only pay for what you sell. However, a wholesaler may be reluctant to offer credit to a new and untested business. So, you may need to lay out capital to have products to sell.
• Reserve funds: It’s all very well considering different startup costs but what timeframe are you looking at when it comes to turning a profit? What happens if there are unexpected circumstances such as a downturn in the economy? Do you have an emergency plan for what to do in a recession? Part of your plan when it comes to startup costs must include reserve funds that can cover any emergency.

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Funding

While obviously part of your startup costs, funding can also impact your ongoing expenses. A very small business may be self-financed; the proprietor may even remortgage the family home to provide funds.

But many businesses will finance their venture by using some form of loan. With that in mind, it’s vital to figure this in as it can be a major hidden cost of starting a small business.

Let’s say you borrow $30,000 from the bank to finance your startup. You must pay that back in installments along with added interest. Of course, some financial institutions may defer the start of repayments, which can be hugely beneficial for a fledgling business. But you should always be looking at any repayments you have to make in the first two years of business. Needless to say, it’s worth considering all of the small business funding options before making a commitment.

5 hidden costs of starting a small business

If the above list of startup costs looks daunting, don’t panic. Remember that some of them such as equipment purchases will be one-off costs. And if you invest wisely, this equipment should last you for several years.

However, your business plan should also take into account a few extra costs you are likely to incur in the first year of operation. Here, we’ve outlined five hidden costs of starting a small business…

1.   Additional loans

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Business can be a rocky journey, particularly for startups. What happens if you’re a few months into running your business and funds (including any reserves) run dry? It can be very tempting to take out additional loans to shore up the company. But these may come with higher interest rates and you could, in the worst case scenario, find yourself in a cycle of debt.

2.   Shrinkage

If your business involves selling any sort of physical product, then shrinkage is a very real risk. In fact, one report suggests that shrinkage cost retail businesses upwards of US$90 billion in 2021 alone. Shrinkage can be due to various reasons, including shoplifting, vendor fraud, employee theft, and human error. While you may not eliminate shrinkage altogether, you can reduce it through careful monitoring.

3.   Insurance

Chances are insurance is something you have factored into your initial cost of starting a small business plan. However, the need for insurance may increase as your business progresses, particularly if you are experiencing growth. You may take on more employees or need to move to larger premises. Recognizing that insurance costs could increase needs to be part of your plan.

4.   Utilities and other costs

While these may not exactly be hidden costs, recent global events have shown that you could experience dramatic increases, especially in areas such as electricity or fuel. You should be looking at ways to cut costs in every area, from energy-saving devices to using software that reduces the cost of international calling from Canada.

5.   Taxes

As Benjamin Franklin famously said, “...nothing is certain except death and taxes”. As a small business, you may face a raft of different taxes, some of which may have to be paid monthly, others annually. What’s more, you may have to pay taxes on your employment status, employees, property, and the products you make or sell. Automating some tax payments makes sense, but you should be aware of what taxes you will be responsible for in the fiscal year.

What’s next?

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Nobody ever said starting your own business would be easy. If anything, it’s quite the opposite. However, if you approach your idea carefully and make a comprehensive list of all the costs and expenses you may face, especially in that crucial first year, then there is no reason you can’t create a successful venture.

Once you have that initial idea and have established that your idea is viable, then make a list of all the costs you might face using our guide. Keep in mind that many of these costs will vary depending on your type of business and even your geographical location.

Besides looking at the costs themselves, you should also consider ways to save money. In particular, look into any local or national schemes when it comes to things like small business grants or tax breaks. If it fits your business model, you should also look at areas where automation can save you money and improve operational efficiency.

At the end of the day, knowing the key things to consider before starting a business is a crucial step to success.