It takes money to make money — but when starting up your own business, some of the costs might surprise you. Starting a business requires more than just big investments like buying equipment and paying your staff — small-business owners also face less obvious expenses to keep the business running and help it grow.
Click through to learn if you’re ready to start your own business, and discover the costs you might encounter along the way.
Surprising Cost No. 1: Business Insurance
Starting your own business can be risky. Business insurance protects you — and all the money and time you invested — against lawsuits and financial liabilities.
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The Cost of Business Insurance
The cost of business insurance depends on your coverage, industry and the assets you’re protecting, so your best bet is to call an insurer for an individual quote. However, Insureon, an insurance company that services small businesses, reports that small-business owners pay an average of $741 annually for general liability insurance.
Signing up for general liability insurance protects you from liability claims, negligence and property damage, as well as lawsuits if one of your employees is injured on the job. You’ll also want to take out property insurance for any property you own, as well as vehicle insurance for business vehicles.
Surprising Cost No. 2: Self-Employment Taxes
Being your own boss has some serious perks — you can delegate tasks however you’d like and guide the trajectory of your business without having to answer to upper management. However, you’ll have to pay a little bit extra at tax time for self-employment taxes.
Related: How to File Self-Employment Taxes
The self-employment tax covers Social Security contributions and payment for Medicare. Normally, employers pay a portion of these contributions for you — but as your own boss, you’ll pay them yourself.
The Cost of Self-Employment Taxes
According to the IRS, the self-employment tax is 15.3 percent if you make $127,200 or less. The Social Security portion of the tax is 12.4 percent of your income, and the Medicare portion is 2.9 percent. So if you earn $70,000 per year, you’ll pay $10,710 in self-employment tax. Any net income in excess of $127,200 is taxed at 2.9 percent.
Surprising Cost No. 3: Licenses and Permits
Setting up your own business can include a fair amount of red tape. And cutting through that red tape comes at a cost since most permits and licenses require a fee.
For example, you might need to pay a license fee to your local government to build or renovate your business property. Depending on your industry, you might also need to file for a local or state business license. Business owners may incur additional costs to set up an LLC or other articles of incorporation if they want to further legally protect their business and assets.
Julie Pukas, head of U.S. bankcard and merchant solutions at TD Bank, offered advice about how to combat the influx of startup fees. “Plan ahead, and keep reserves — either cash or credit — available for emergencies,” she says. “In many cases, this is where a business credit card is especially useful. It can provide some financial support for unexpected costs.”
The Cost of Licenses and Permits
Consult your city government to find out exactly which permits and licenses you need. The cost will vary based on where you live and which permits are required, so an individual quote is best.
Surprising Cost No. 4: Professional Fees
Even though a 2017 survey of small-business owners from TD Bank found that more than 65 percent of business owners are confident in every aspect of business management — from handling the finances to marketing and advertising — you shouldn’t hesitate to reach out to a professional if a business need falls outside your realm of expertise.
“The biggest challenge for entrepreneurs is that most business owners try to be all things in the business — I call it the ‘chief cook and bottle washer,'” said Jay DesMarteau, head of small-business banking for TD Bank.
The Cost of Professional Fees
Those smaller tasks can distract you from running your business properly, so it’s smart to seek help when you’re overstretched. You might hire a lawyer, for example, to help you set up your business and visit an accountant or tax professional to keep in good standing with the IRS. Hiring a lawyer generally costs between $100 and $400 an hour, reported David Goguen, from Lawyers.com. Debt.org listed tax preparers at an average of $229 for itemized tax returns.
According to the small-business survey, 25 percent of business owners consult a financial advisor or dedicated banker who provides free insights on how to grow and advance their business needs.
Surprising Cost No. 5: Networking Costs
Sure, you already know that direct advertising costs money. But what about the costs of marketing your business in person?
While your region may have a few free business networking resources, you should plan for some networking-related fees. That might include the cost of joining your local Chamber of Commerce or per-event costs for industry networking meetings. You should also budget for other costs related to networking, including buying refreshments at the meeting or transportation to and from each networking event.
The Cost of Networking
The cost of joining your Chamber of Commerce is variable depending on where you live but typically ranges from $300 to $400 annually. National Chambers may cost more. A basic (Signature) membership to the U.S. Chamber of Commerce, for example, requires an investment of $300.
Surprising Cost No. 6: Continuing Education
At times, running your own business can feel like learning on the job. But if you want to grow your business and develop your reputation in the industry, you’ll need to invest in ongoing education, too.
Depending on your industry, that might involve taking courses to keep your skills up to date or to develop new skills and expand your client base. In other cases, it may simply mean attending trade shows and conferences to learn about advances in your industry.
The Cost of Continuing Education
How much you budget for continuing education is up to you — a course at your local college might cost a few hundred dollars, while registration and travel fees for a large conference could run well into the thousands. On the more affordable side, picking up a few new books about your industry generally costs less than $100. There are lots of great, affordable books for aspiring entrepreneurs.
Surprising Cost No. 7: Bad Credit
The last item on the list of hidden business expenses isn’t something you can pay for in cash, but it could still drain your wallet if you’re not careful. At some point in your career as a business owner, you may need to borrow money to give your business a leg up, but you won’t be approved for a business loan if you don’t monitor your business and personal credit scores. Of all respondents in the TD Bank survey, only 15 percent could identify their business credit scores or knew how they impacted their finances.
The Cost of Bad Credit
While qualifying for a business credit card is based off of your personal credit score, using your business credit card wisely will affect your ability to get a loan in the future.
In fact, 46 percent of survey respondents reported using a business credit card frequently to fund their businesses. About 74 percent of those expenses included office supplies and materials, but business owners said they turn to credit to pay for everything from the gas in their company cars to their office building rent.
DesMarteau recommended treating business credit just like personal credit. “A business credit score is typically used — along with debt-to-income ratios — to make lending decisions for well-established companies,” he said. “Paying bills on time and not taking out too much debt will boost a score and make that business a more attractive loan candidate.”
That will affect your business credit interest rates as well. Especially if your business is just starting out, many lenders will look to your personal credit score as a marker of how well you might manage your money as a business owner. “Prioritize things like making payments on time and keeping credit utilization low in order to build your score,” Pukas said.