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Financial Hurdles Every New Business Owner Should Prepare For

overhead view of desk with people working on analytic documents and laptop
March 05 2021 • by Marissa Scott • Budgeting, Business

When you’re starting a new business, the amount of tasks to check off your list can feel overwhelming. There are many moving parts to keep up with and it can often be difficult to anticipate the financial hurdles you may encounter along the way. But preparing for financial considerations is an important step in getting a new business off the ground. The Bureau of Labor Statistics reports that one of the top reasons businesses fail is due to a lack of cash flow. If you start up your business with only a small amount of financing and do not have sufficient cash flow right away, you may find yourself financially stretched.

Many new business owners forget that it takes more than a good idea and start-up capital to successfully start a business. You’ve got to be prepared for all of your expenses and overhead. Here are some costs to be aware of and prepare for as you grow your business.

Regulatory Fees

Most businesses need to be registered in the state they are operating in. For example, in Massachusetts, you’ll need to register your business with the Office of Housing and Economic Development. If your business operates out of Rhode Island, you would need to register with the Secretary of State’s Office. There may be different fees associated with the registration process depending on what type of business you own and whether it is a Corporation, LLC, or other business entity. 

Most businesses also require professional licenses or permits. These may be required at the federal, state, and/or local level, depending on what type of business you’re running. Your business industry will also dictate where you will obtain your licensing and permits from, and how much they will cost. For example, restaurants serving alcohol would apply through the Alcohol and Tobacco Tax and Trade Bureau, while a transportation company would need to register through the U.S. Department of Transportation. The SBA has a handy chart available to help you determine which issuing agency you should go through for your business licensing needs.

Items to Factor into Your Budget

Once you have taken care of associated start-up fees, there are reoccurring fees to prepare for as well:

•    Taxes. You’ll want to be sure there is distinct separation between your personal and business finances. This will make it easier when tax time comes, and it may also help protect your personal assets if a problem arises. Apart from paying income taxes for your business, you’ll also need to prepare for payroll taxes and property taxes. Failing to pay taxes for your business can have severe financial consequences.

•    Marketing. Once you’ve got your business up and running, you’ll most likely want to put some funding behind increasing awareness of your brand and obtaining new customers. These marketing expenses could include building and maintaining a website, creating collateral material and signage, and any advertising you need to do. The Small Business Administration suggests spending 7-8% of your gross revenue on marketing.

•    Unpaid customer invoices. Unfortunately you may find yourself in a situation where a customer does not pay their bill in full, or even at all. When planning your cash flow, it’s a good idea to build in a buffer for these types of late customer payments and non-payments. That way, you won’t find yourself trying to make up for the lost revenue. Not having the funds you were planning on can put a strain on your ability to pay your suppliers or make payroll. If applicable to your business, it could be beneficial to have a system where buyers pay upfront or commit to written payment terms if you are extending credit. While you can try to collect late fees or send someone to collections for late payments or non-payments, there’s a cost involved, and it may prevent you from doing business with them in the future.

•    Need for future additional financing. When you do find yourself in a cash crunch, you’ll want to make sure that there are options available for you. Many businesses establish a line of credit ahead of time to hold them through any rough times that may arise. If you need to apply for a business loan, it’s a good idea to have your business plan, financial records, and collateral lined up ahead of time. You’ll also want to ensure that you’re keeping your business credit score and personal credit score in good shape, so that you’ll have an easier time securing financing for your business when you need it down the road.

Situations You Can’t Plan For

COVID-19 is the perfect example of something business owners couldn’t have planned for. No one expected a global pandemic that would lead to government shutdowns - but it’s impacted just about every industry in one way or another. What you can do is plan for the unexpected in the same way you might put personal finances towards an emergency fund. You can almost guarantee something will happen along the way that will impact your grand plan. It might be a competitor that decides to undercut your pricing, a new law that goes into effect that tacks on regulatory fees, or a physical disaster like your water pipes bursting and forcing you to make multiple repairs. 

Even with ample insurance coverage, it might take some time to get a payout. You’ll need to keep your business running in the meantime. Create a safety net in your budgeting to allow you to continue operations when something unexpected happens.

Any financial hurdle can affect the amount of working capital you have to run your business. You may have had enough money to get your business started, but that doesn’t guarantee you’ll have enough to grow it to the point where it’s profitable. Many entrepreneurs fail to account for the added expenses that come up after a business is off the ground, and it can prevent them from expanding down the road. 

If you’re interested in starting a conversation about successfully growing your business, don’t hesitate to contact our dedicated team of commercial lenders and small business banking experts.