Hidden Expenses of Starting Your Own Business

Sure, you've heard that it takes money to make money — but some of the costs of starting your own business might surprise you. According to a 2017 TD Bank small business survey, the No. 1 challenge business owners nationwide expect to face in the coming year has to do with the health of the economy.

When you consider that the economy dictates everything from taxes, to insurance rates to the ability to bring in customers, that challenge makes a lot of sense.

Starting a business requires more than the bigger investments like buying equipment and paying your staff — small business owners also face less obvious expenses to keep the business running and to help it grow. Here's a list of the "hidden" expenses you might not initially consider when deciding to start a business, as well as some strategies to prepare for them.

Business Insurance
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Business Insurance

Starting your own business can be risky. Business insurance helps protect you — and all the money and time you invested — against lawsuits and financial liabilities.

Sign up for general liability insurance, which 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.

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 business, reports that small business owners pay an average of $741 annually for general liability insurance.

Self-Employment Taxes
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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 to cover self-employment taxes.

The "self-employment tax" covers social security contributions, as well as payment for Medicare. Normally, employers pay a portion of these contributions for you — but as your own boss, you'll pay them yourself.

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.

Licenses and Permits
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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 include some type of fee.

For example, you might need to pay a fee to your local government to build or renovate your business property. Depending on your industry, you might need to file for a local or state business license as well. Business owners can incur additional costs to set up a 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 said. "In many cases, this is where a business credit card is especially useful — it can provide some financial support for unexpected costs."

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 you need, so an individual quote is best.

Related: The Best and Worst States to Start a Business

Professional Fees
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Professional Fees

Though the survey 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. Take it from Jay DesMarteau, head of small business banking at TD Bank, who said, "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'."

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, J.D. at Lawyers.com. Debt.org listed tax preparers at an average of $229 for itemized tax returns.

According to the survey, one quarter of business owners consult a financial advisor or dedicated banker, who provides free insights on how to grow and advance their business needs.

Networking Costs
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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 to transportation to and from each networking event.

The cost of joining your Chamber of Commerce is variable, depending 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 $500.

Continuing Education
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Continuing Education

At times, running your own business can feel like peak "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.

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.

Bad Credit
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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 both your business and personal credit scores. Of all respondents in the survey, only 15 percent could identify their business credit scores, or knew how it impacted their finances.

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."

And speaking of personal credit, 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 advised.

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