Launching a Small Ecommerce Business? Consider 9 Hidden Costs

Many small businesses are thriving in 2020 thanks to the explosion of ecommerce and consumers’ returned focus to shopping “small.” Though Black Friday wasn’t quite as lucrative as Adobe Analytics predicted, the kickoff of the holiday shopping season still increased by 22% year-over-year to $9 billion in the United States, with Cyber Monday seeing 15% YoY growth to a record $10.8 billion in sales. 

While it’s undoubtedly an exciting time to be an online retailer, don’t let the recent marketplace wins fool you into believing that launching a small ecommerce business is easy. On the contrary, doing so is fraught with challenges like inventory management, complicated sales tax liabilities, and manual data entry. But fear not—our friends at Square have helpfully broken down the startup costs you need to worry about,  and offer actionable advice on how to calculate them before you look into financing options.  

Below, we’ve added insights from industry experts on how to gain visibility into the hidden costs associated with launching an ecommerce startup. Ready to look before you leap? Read on.

Loans

Most small businesses launch with the help of a loan, whether it’s from a bank or another traditional lender. If your company hasn’t yet secured the right tax and revenue documents during registration, the terms of your loan will depend on your personal credit and financial history. That means if you have a poor credit score, you’ll have a hard time getting approved for a loan, and if you do secure one the terms might be less than desirable. 

The hidden cost behind small business loans? Interest. High interest rates can derail your repayment plan, and late payments drag down your credit score even further. Fixing your credit upfront can save you thousands in interest, but you should still account for loan interest when planning your cash flow.

>> Questions? Don’t panic—check this FAQ from the U.S. Chamber of Commerce. 

Employee Expenses & Turnover

You’ve probably already accounted for your staff’s yearly pay, but the ancillary expenses of keeping them (happily) onboard are often easy to overlook. If you don’t already know how much these benefits cost, take some time to add everything up: How much will you be spending on taxes, health insurance, and on-the-job perks? Even small expenses like office snacks or phone bill stipends add up quickly. Joe Hadzima of the MIT Sloan School of Management recommends multiplying each employee’s salary (or yearly pay) by 1.25 to 1.4 to get a better picture of the true cost of their hiring. 

Another hidden employee-related cost is turnover. Though offering too many perks can negatively affect your cash flow, not offering any runs the risk of impacting your employee turnover rate. Research shows that it costs about one-fifth of a worker’s salary to replace an employee once they’ve departed, so it’s far more cost-effective to retain employees than find new ones. (As you know, the same concept applies to customers!)

>> Hadzima has plenty of solid resources that advise entrepreneurs on how to manage employee operations. See his full collection here.

Fees, Permits & Licenses

As a small business owner, you most likely recall the registration process involved in securing the permits and licenses your company needed to launch. You might not, however, remember that those documents need to be renewed regularly. This is a surprise cost for plenty of entrepreneurs, who erroneously assume that many aspects of launching a business are “one and done.” 

Need help remembering what’s on the line? Join your local chamber of commerce or any number of in-person or virtual industry groups that provide members with updates and business exposure. They’ll keep you posted on the latest regulations and also help you grow your business through word-of-mouth referrals. Just be wary of the annual cost of these memberships and factor those into your yearly budget. 

>> This guide from the U.S. Small Business Administration is a great resource for understanding the must-have documentation for running your business.

Technology

Even the savviest sole proprietors can’t run their businesses alone—they rely on a host of small-business technologies and other administrative tools like VoIP phone calling and domain-matching email. And today’s automated solutions help startups save time, increase visibility, and boost the bottom line through data-driven decisions, so they’re a must-add to your small business arsenal. Other business tech can include marketing tools, customer service platforms, and accounting automation software. Planning on adding one or more of these to your tech stack? Don’t forget to update your business budget, or the costs might surprise you at the end of the month.

>> Here’s how technology solves small ecommerce business’ pain points and takes them to the next level.

Insurance

It’s true that your business might not need a lot of insurance in its infancy, but the policies can really stack up as time goes on. Small businesses typically start with general business insurance and liability insurance, then later add on policies for errors and omissions, workers’ compensation, property, and cyber insurance. The price of each policy depends on nearly a dozen factors —from the type of business you run to your present risk factors — and could easily stack up to thousands of dollars a year. Make sure you don’t lose track of these rising costs as you purchase additional insurance products.

>> Even if nothing has changed with your small business, you should be shopping for insurance policies annually. These are the 7 best providers, as reviewed independently by Investopedia.  

Taxes

When you’re an employee, you get used to having taxes automatically deducted from your paycheck, but they become your own responsibility when you pursue entrepreneurship. It’s common for new small business owners to underestimate their business’ tax responsibilities and be shocked at tax time. However, there are a few ways to mitigate how much you owe the federal government. Consider:

• Investing in a retirement fund to reduce your taxable income.
• Structuring your business as an LLC, which pays less than sole proprietors.
• Deducting all business expenses, including business travel.

With a bit of research, you can determine the most cost-friendly way to operate your small business. 

>> Calculate your small business taxes with this calculator from Taxfyle. 

Administrative Costs

Renting an office is a hefty expense, but stocking your office with the essentials can also sneakily add up in the long run. You might have taken things like computers, phones, printers, and other office supplies and utilities for granted as an employee, but those costs are your dime now. 

Even if you don’t have an office, you’ll be paying for things like your website and employee email addresses. These are low-cost items individually, but they can aggregate into a real bundle, especially as you grow your team. Don’t miss these hidden costs when creating your budget, and be sure to note most of these items will need to be replaced regularly.  

>> Take a deep dive into administrative expenses with another guide from Investopedia.

Legal Fees

Small businesses are the biggest victims of both frivolous and legitimate lawsuits, according to research from the NFIB. The cost of legal battles, therefore, qualifies as hidden because lawsuits are largely unexpected. Small businesses can pay up to $5000 in settlement fees at the end of a lawsuit—not to mention any attorney fees—and are often subject to higher insurance costs once the ordeal is over. 

In total, settlements cost businesses hundreds of hours (that they could have spent more productively) and $35.6 billion annually. But while lawsuits may be unpredictable, these tips from LegalZoom can help keep your business out of the courtroom:

1. Get every agreement in writing, and follow through on your end.
2. Create and enforce sound employment practices.
3. Practice clear and consistent communication.
4. Form a relationship with a small business attorney.
5. Purchase the appropriate liability insurance. 

>> The holiday season brings increased risk. Protect your business with these tips from Square. 

Time

As the old adage goes, Time is money. And while time might not be a tangible asset with a price tag, it’s a valuable resource that needs to be spent wisely. Many startups spend too much time on manual or unscalable processes, which takes away from the business’ focus on marketing, managing, and most importantly, selling. That’s no way to spend your day if the goal is growth. Word to the wise: Run an audit of your typical day to see if there are administrative tasks that can be delegated or (better yet) automated, so you can ditch the busywork and get back to business. Don’t forget to leave time for yourself and your loved ones—rest and relaxation are must-dos if you want to avoid burnout. 

>> Time tracking tools like Focus Keeper and Trello can keep you organized and on task so you can make the most of your day and accomplish your goals.

By guest contributor Taylor Knauf