4 Huge Expenses That Can Bankrupt Unprepared Startups

A new business is often just one lawsuit away from disaster.

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By Brendan M. Egan

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Launching a startup takes courage -- and cash. About one-third of new businesses fail within their first two years, and about 50 percent of new businesses are no longer around after the five-year mark. Why? According to U.S. Bank, it is estimated that 82 percent of businesses that don't make it fail because of cash flow problems.

It's no secret that it takes a significant amount of money to launch and operate a startup. But sometimes, entrepreneurs underestimate how much they will need to cover their expenses. Here's a look at the top five expenses that startup founders fear the most.

Related: 6 Entrepreneurs Share the Brilliant, Crazy Ways They Took Their Companies From Pennies to Profit

1. Legal fees

Entrepreneurs will need a lawyer to assist with a number of different legal matters. For example, lawyers can assist with the formation and incorporation of your business. Lawyers can also help entrepreneurs protect the intellectual property that the company relies on to do business.

Lawyers are invaluable assets who can help entrepreneurs overcome legal obstacles on their path to success. But unfortunately, their services do not come cheap. Legal fees can add up quickly, so this is an expense that every entrepreneur fears.

To save on legal, consider researching online templates and documents that can give you a head start on your legal planning. Things like operating agreements, form contracts and terms of service can all be found online by doing a quick Google search. Get these documents to where you feel they are 90 percent of what you need, then bring on a lawyer to bring things to the finish line.

2. Taxes

Entrepreneurs are usually well aware that they will have to pay taxes, but they may be surprised by the amount they will have to pay. Even if you are not making a huge profit, you will still probably owe something.

To minimize these expenses, it's best to work with an accountant year-round. An accountant can make sure you are taking advantage of all of the deductions available to lower your tax bill. Having a sound tax strategy will help you maximize the amount of money you have to reinvest each year in your startup.

Related: Founders Keep Making These 9 Common Mistakes That Crush Promising Startups

3. Interest and funding

A lot of entrepreneurs have no other choice but to take out a business loan to finance their dreams. In fact, the National Small Business Association estimates that 69 percent of small businesses used loans or another type of financing in 2016. These loans may seem like a quick and easy way to inject cash into the business. However, many entrepreneurs forget to factor in interest payments when deciding whether or not it's a good idea to take out a loan.

The exact interest rate will vary depending on the type of loan and your current situation. Don't get caught off guard by an unexpected interest payment. If you are planning on taking out a loan, be sure to read the fine print carefully before signing on the dotted line.

Another popular route many startups are taking is turning to crowdfunding sites like Kickstarter and Indiegogo. These sites allow startups to crowdsource funds often at a much more attractive term than a traditional loan.

4. Shrinkage

Startup companies that are selling products in a brick-and-mortar setting, or even online, may experience a surprising amount of shrinkage. The 2016 National Retail Security Survey revealed that shrinkage costs companies in the U.S. about $45 billion every year.

To prevent shrinkage, entrepreneurs must first determine where their products are the most vulnerable to shrinkage. Shrinkage can occur because of shoplifting, employee theft and errors. Shoplifting is by far the most common cause, so you may want to start by here. For example, a retail business owner will need to consider installing a security system, hiring enough people to watch over customers, and training employees to look for signs that someone is shoplifting. Preparing in this manner can help entrepreneurs fight shrinkage and protect their finances.

Ecommerce businesses should ensure they have a proper auditing system in place to prevent errors and lost product.

There are only so many hours in the day, so time is by far the most valuable resource that you cannot afford to waste. Entrepreneurs often fear that they will hurt their business by not managing their time wisely. Are you spending too much time on activities that could be outsourced? Are you not spending enough time on networking and acquiring new clients? These are the questions that haunt every entrepreneur.

Related: How Small Businesses Are Solving Big Business Challenges

The way you spend your time can also impact your personal life. Entrepreneurs must be committed to launching their business, which often means working long hours and leaving little time for their loved ones. Because of this, many entrepreneurs fear that their new venture could affect their personal relationships.

There's no reason for startup founders to fear how much time they will spend on their business. There is a way to find a balance between work and your personal life, and that is good time management. Make the most out of every moment in your day so you can get more work done and leave more time for loved ones. Eliminate distractions in the workplace, delegate low-value tasks to others, and take advantage of scheduling and time management apps to keep you on track.

By preparing for these expenses, entrepreneurs can ensure their startup is part of the one-third of businesses that hit their 10 year anniversary.

Brendan M. Egan

Founder & CEO of Simple SEO Group

Brendan Egan is an entrepreneur involved in more than a dozen startup companies. His primary focus is running Simple SEO Group, a digital marketing and web development company he founded nearly a decade ago. He published his first book, "101 Tips From The Marketing Masters," in early 2020.

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