These are pretty standard costs that most businesses have to deal with. But there are other hidden costs that many startups tend to ignore or delay. Let’s explore four of the most overlooked startup expenses and consider why they are essential.
1) Professional Liability Insurance
Startups generally purchase insurance for property, equipment, and vehicles. But what they miss is professional liability insurance (PLI). Your clients/customers can sue your business for a variety of reasons:
- They are not satisfied with your product/service
- They have incurred any loss/damages
- They felt deceived
- Any other reason
In such cases, PLI provides you with a shield and covers legal defense costs as well as settlement costs.
Why is it important? Because mistakes, negligence, omittance, etc. can occur — whether by you, your full-time employees, or even temporary staff or independent contractors. As a business, it’s your responsibility to pay the legal penalty, even for your employees’ professional misconduct. If someone sues your startup, the defense cost and settlement amount can shrink your liquidity or even leave you bankrupt. As a startup, you can’t afford any legal battles. That’s why always take PLI from day one of the business.
2) Legal Agreements
We assume that you have already included incorporation costs on your checklist. But don’t miss out on preparing the two legal agreements listed below at any cost:
Founder Agreements
If you’re running a partnership business, you must make a legal agreement that defines your:
- Role, rights, responsibilities
- Liabilities
- Equity share
- Voting rights
- Usage of intellectual property
- Any non-disclosure agreements (NDAs)
- Share in profits and loss
Some partners are only profit-sharing partners and don’t contribute to losses or have limited liabilities in the event of a loss. Some are sleeping partners who generally have fewer rights and responsibilities. Needless to say, such agreements are a lifesaver at the time of disputes. They’re also needed at the time of applying, debt, or loans. If you’re seeking funding from business accelerators or venture capitalists, you must have the legal documents defining their equity share and voting rights.
User Agreements
All businesses should have agreements for:
- User terms and conditions
- Privacy policy
- Cookies policy
- Agreement that defines users’ rights and duties at the time of disputes
With these types of agreements, users need to indicate that they agree with your terms of service. They typically do this by selecting “I agree” on the agreement form when they make a profile or buy products/services from your platform.
Regardless of whether users actually read these agreements when they hit the “I agree” tab, they’re quite helpful at the time of disputes and court cases. So, as a business, don’t take them lightly! You must get these agreements developed and customized by the attorney before starting the business.
3) Payment Card Processing Fees
Setting up a payment gateway is easy and free. But you need to pay a stipulated percentage of transection fees plus a fixed charge on each transaction.
For example, PayPal charges approximately 2.5% to 4% of the total amount of a transaction, plus an additional $0.25 to $1 fixed fee for each domestic transaction. For international transfers, fees are even higher. If you want instant withdrawal from your PayPal account to a bank account, it’s going to cost an additional 1% of the amount transferred, with a maximum fee of $10.00.
Suppose you sell goods or services worth $10,000 and your profit margin is 20% of the sales price. This means that you’ll end up paying $400 to PayPal in transaction fees. With a 20% profit margin, this means that your profit is going to be $2,000. If you look at this in terms of your profit, you end up paying 20% of the profit in transaction processing fees — and we haven’t even included any fixed fees per transaction yet!
Let’s consider a scenario where the amount per transaction is less, and the number of transactions is high. Suppose you’re selling subscriptions for $5. Now, for each transaction, you’ll pay a $0.50 fixed rate, or what equates to 10% of the subscription amount. Plus, you’d have to fork over another 4% of total transaction fees. That’s going to be another $0.20. So, for every $5 subscription you sell, you wind up paying $0.90, i.e., 18% of the revenue as the payment processing fees!
Many startups ignore these costs when they see a small percentage and just some cents as processing fees. But as you can see, even small costs can eat up a large percentage of your overall revenue and profits. Hence why you should always consider these payment transaction fees at the time of making budgets and deciding product/service price.
4) Security
There are many cybersecurity myths prevailing in the market. One of them is “small businesses shouldn’t worry about cybersecurity.” However, statistics show a different picture — nearly half of all cyber-attacks, costing approximately $3 trillion in damages are estimated to get committed against small businesses by 2021. You simply can’t ignore or delay the security aspect, no matter how small your startup is.
- Reach out to your hosting provider and ask them which security features they provide.
Some of the common security features are DDoS attack protection, hacking protection, automatic backups, malware scans & malware protection, attack monitoring and prevention, and email protection and anti-spam tools. Some of these features will be free, while others can be added at a small cost.
- Encrypt your website visitors’ data with an SSL/TLS certificate. Always choose an SSL certificate that offers warranty and site seals (also known as TrustLogo).
- Use firewalls and anti-virus software to protect yours and your employees’ devices from malware.
- Use email signing certificates (S/MIME) to protect your customers and staff from a phishing email and spoofing attacks.
- If you have a WordPress site and wish to make it more secure, install plugins like Limit Login Attempts, The iThemes Security, Force Strong Passwords, WP-DBManager, Google Authenticator, WP Security Audit Log, Configurable Hotlink Protection, CodeGuard, All in One WP Security and Firewall, etc.
Some of the above security tools are free, while others are quite inexpensive. Nevertheless, you can’t ignore the security aspect of your business and the costs associated with it.
Having a startup in this unpredictable time is a brave step. The risks are infinite, ranging from pandemics and natural calamities to economic and political unrest. You may find yourself fighting many battles at once. But planning for these seven expenses will help you to protect your startup against some legal battles, save your business from some common cyber-attacks, and help you to do better financial planning.
