Starting a small business is an expensive process. You’ve probably already considered many of the major costs like hiring employees, purchasing equipment and leasing office space. However, there are a number of hidden costs that you might not be familiar with — and they have a tendency to appear at the worst moments.
From small business loan fees to shrinkage, there are a lot of potential expenses that can rear their head when it comes time to build a business. By knowing what to look out for, you can plan your financing and spending so that you’re not blindsided when you run into them. Let’s take a look at a few of the most common hidden costs, and how you can prepare for them.
Small business loan fees
Few people have the capital to start a small business entirely with their own money. A common solution is financing, which can be done through small business loans, personal loans or even credit cards. Although borrowing money will help you split the costs of a large purchase over an extended period of time, you must pay interest, determined by the lender, on top of the money you borrow.
The reason you may choose to pursue financing for your business can range from purchasing equipment to financing daily operations, but your monthly payments aren’t the only expense you should consider.
In addition to interest, most lenders will charge a number of additional fees, which may greatly increase the cost when you take out a small business loan. These include, but are not limited to:
- Origination fees
- Prepayment penalties
- Service or processing fees
- Referral fees
- Packaging fees
- Late payment fees
- Wire transfer fees
Similar to interest, the different types of fees that you are responsible for will depend on your lender. The amount you have to pay for these fees will also range depending on where you choose to do your financing.
Often, fees are factored into your annual percentage rate (APR), but other fees, like late payment or prepayment fees, can’t be included in your monthly payments.
It’s important to carefully review your loan terms and ask your lender questions to understand which fees you will be responsible for when you take out a small business loan.
Permits and licenses
Regardless of what type of business you run, you will need some form of license and/or permit from federal and state agencies. Depending on your location and the type of business you’re starting, the required licenses, permits and fees will vary.
The Small Business Administration (SBA) provides a comprehensive guide to the different types of federal and state licenses and permits you may need. Furthermore, your state or local government may have resources to help walk you through the process or connect you with someone who can mentor you.
This often isn’t a one-time expense. Similar to renewing a driver's license, you will need to prepare for license and permit renewal costs. Be sure to review which licenses and permits you need, what you need to apply for them, and how long it will take you to finally receive them. This will help you determine how much the permits and licenses will cost before starting your business — after all, time is money.
Hiring employees isn’t a one-time expense either. You must also consider the costs of hiring, training and off-boarding if they leave. Over the years, employees will come and go, and these costs can add up despite their intangible nature.
There are more jobs available on the market today than ever before, meaning keeping your best employee is an increasingly difficult and expensive priority. Not only will it take time and money to rehire and retrain a new employee, but in order to attract similar talent, you may also have to pay for incentives like signing bonuses and relocation expenses.
On the other hand, firing employees will rack up similar charges, with a few additional ones. Not only will you be responsible for a severance package and unemployment benefits, but if an employee is dismissed improperly, you may potentially open yourself up to lawsuits.
At the end of the day, you can mitigate these expenses by creating an environment that discourages turnover. But no matter what you do, you will always have to face some level of employee turnover, and it's best to be prepared for the eventuality.
Depending on the laws in your region, hiring an employee will cost more than an hourly wage or salary — you will also need to provide benefits, which might include:
- Health insurance
- Dental insurance
- Retirement benefits, such as a 401(k)
Hiring an employee can become more difficult depending on the competiteveness of the job market and the number of job opportunities available. To combat this, many companies today offer benefits that were once considered unusual. These benefits have no limits depending on the size of your firm and range from free lunch to car washes and childcare facilities.
No matter the size of your company, benefits are a real cost that you may not consider when hiring an employee. When estimating the cost of your staff, you may wish to increase the cost by 30% to account for benefits. Alternatively, you can use $11.55, the average hourly cost of employee benefits, according to a survey by the Bureau of Labor Statistics.
If your business relies on inventory, then shrinkage is an important cost you must keep track of.
Shrinkage is the loss of inventory, which can be caused by a number of factors like theft or product damage. Formally speaking, it's the difference between recorded inventory and your actual inventory.
Retail businesses may seem simple to predict upfront — you simply make the difference between what how much you sold a good for and how much it cost you to buy. Once you sell enough products to offset your expenses, you make a profit. However, when you experience excessive shrinkage, it becomes more difficult to turn a profit.
If your shrinkage is due to theft, you may wish to invest in a security system, which will add to your costs. However, if you are losing inventory due to other reasons, it may take time to get to the root of the problem.
Together, hidden costs -- including small business loans, permits and licenses, benefits, shrinkage and more -- make up a significant portion of your annual business expenses. Before starting your business, remember to take these costs into consideration so that you can accurately plan your business spending.