In today’s world, launching a new business has never been easier, thanks to the ease of operating online. Businesses don’t have to worry about office space, retail locations, rent prices or losing time and money during a lengthy commute.

There is a lot of convenience that comes with owning a digital business. You can work from anywhere, and your business automatically has a global audience. Without the constraints of a physical location, your business has the capacity to scale up infinitely. 

There are some significant costs to starting an online business from the bottom up, however. In this article, we will discuss the “hidden costs” of starting an online business from scratch, and why it may be a better investment to purchase an existing digital business instead. 

1 –  Legal Costs

Taxes and legal fees is one of the main concerns of any small business owner. Failing to set aside money for these expenses can literally bankrupt your business within the first year. If you are starting a business from the ground up, you might not be familiar with self-employment taxes and other business-related taxes. 

Taxes and legal fees is one of the main concerns of any small business owner. Failing to set aside money for these expenses can literally bankrupt your business within the first year. Click To Tweet

Of course, this depends on which country, district or state you live in. For example, if you are operating within the USA, the self-employment tax is 15.3% for those with net income of $127,200 or less. The Social Security tax is 12.4% of your income, and Medicare is 2.9%. Any earnings in excess of $127,200 are taxed at an additional 2.9%.

Setting aside money for unanticipated tax bills is vital. It’s also important to try to budget for any patent or trademark costs you will need. Imagine developing and bringing to life a unique concept (whether it is a service or a product) just to have your hard work stolen by a competitor. Your business will need to have some money set aside for lawyer’s fees. While everyone hopes to keep this type of spending to a minimum, the truth is your legal liability increases once you operate as a business. 

2 – Business Costs

If your business is in eCommerce, it’s important to decide which shipping service is best for your needs and budget. This will be a continuous cost for your business, so it’s wise to research this in depth. If you are shipping globally, this is even more important to consider. 

All small businesses should be insured, so don’t forget this aspect. Whether your company is offering a service or physical goods, you have to protect yourself from unexpected financial loss. Knowing your hard work is protected by insurance is worth it, if only for the peace of mind you will get. 

In the past, businesses had to hire and retain expensive accountants to manage their financial records for them. Today the standard practice is for online businesses to use cloud-based accounting software that can help relieve stress through automating the processes of sending invoices, payments and paying taxes for a dramatically lesser fee than an accounting would charge. 

Don’t forget the costs of professional memberships and certifications. This is especially valid if your company offers consulting services and not physical products. Social proof is essential to convince leads to buy your services, and professional accreditations can help with that. 

In addition, if you are an international business, your company must also factor in the cost of transactional fees and currency conversion fees. However, the cost of these services will likely be less in the future. 

Businesses and customers relying on crypto for international transactions especially may eventually become the new normal, especially since such transactions can be cheaper and far more secure.  Already, businesses are starting to take an interest in blockchain technology to increase profits. 

3 – Marketing Costs

So, you’ve got a great product or service and an amazing website. You’re all set, right?

Not yet. It doesn’t matter how awesome your business is if no one knows about it. Your company will need to work out a budget for ads that will drive traffic to your website. It would also be wise to budget collaboration fees with social media influencers

This is another benefit of purchasing an online business rather than starting from zero. You benefit from the previous owner’s marketing efforts and existing clientele.

A great benefit when purchasing an online business rather than starting from zero is the ability to capitalize on the previous owner's marketing efforts and existing clientele. Click To Tweet

How much should you spend on marketing and advertising? The answer to that depends on your size and industry. However, the U.S. Small Business Administration advises budgeting 7% to 8% of your gross revenue for marketing and advertising. This recommendation applies to businesses doing less than $5 million a year in sales and with a net profit margin in the 10-12% range. 

Keep in mind that this recommendation is for all small businesses, including brick and mortar stores. Online businesses often have to invest a lot more in ads and marketing to drive traffic. After all, they don’t have the benefit of visibility in a physical space like a retail store does. 

4 – Digital Costs

If you have an online business, you need a website and an email address. 

Your website is the first and sometimes only impression prospects will get about your business. Hiring an expert to design your website is a must, as well as having professional logos and solid copy. If your business is in eCommerce, it is even more important to ensure that your website is user-friendly and visitors can easily make purchases. 

For example, many entrepreneurs know that drop shipping and drop servicing is a lucrative industry. However, new drop-shipping businesses have to invest in the creation of a website and then build and maintain their brand image and loyalty. By purchasing an existing drop-shipping or drop-servicing website, your business can hit the ground running and start turning profits immediately.

If you are not interested in purchasing a digital asset, you will have to build your online business from the bottom up. A good website will cost anywhere from $5k-$10k to design, maintain, host and license in the initial year. Depending on how much traffic your website gets and how much bandwidth you need, you will need to pay monthly hosting fees from $20 to $150. 

If you are tenacious and want to save money on developing your business website, an alternative action you can take is to take online programs that can teach you valuable skills such as web design, programming fundamentals, server side programming, and HTML/CSS knowledge. This is a great option for young entrepreneurs especially, because the knowledge they gain will last them a lifetime. Spending money to increase your own skills is one of the best investments you can make, although it does take time and effort.

Your new company will also likely need to purchase some operational software. Your business will need to have automated email marketing and other ways to keep in touch with customers digitally. It is also important to invest in CRM software so you can keep track of your customers, their buying behaviors and any current issues. 

Studies show that selling to an already existing customer is over five times cheaper, as 60% of the time a resale is achieved versus a 20% rate for new qualified leads. Therefore, it is essential to invest in a software that will keep you in touch with your existing clients. 

5 – Cybersecurity Costs

Investing in cybersecurity is also a must for any digital enterprise. Cyber crime is on the rise, and as a new business you will surely be an easy target. Hackers are continually developing new ways to access customer information, especially credit card and bank information. It wouldn’t look good for your business if all your clients became victims of identity theft, not to mention the legal costs you would incur. 

There are many steps you can take to boost cybersecurity at your business, including but not limited to: rotating our strong passwords with a password manager, storing all data in the cloud, diligently monitoring levels of access within your company, and investing in a Virtual Private Network (VPN) to encrypt all financial transactions and protect yourself and your customers. 

Cybersecurity is a serious concern for new businesses, but ironically it’s also the cheapest to invest in. For this reason, there’s really no excuse to not invest in the above measures. 

Conclusion

Starting an online business is certainly better than starting a brick-and-mortar enterprise. You don’t have the stress of renting office space or the constraints of a physical location. With a digital enterprise, you simply have unlimited room to grow, and when purchasing an existing online business, you’re starting the journey levels ahead of the rest.

However, don’t make the common mistake of underestimating how much it costs to start an online business. There are multiple necessary expenditures you must make. Whether you are starting from scratch or purchasing a digital asset that has already been proven profitable, you will need capital to get started. Budgeting for all the expenses above is essential for running a successful online business. 

Dan Fries

Dan Fries

Dan Fries is an entrepreneur, investor, and writer who shows bootstrapped entrepreneurs and investors how to prepare for an exit by making better long term financial decisions. His website is danfries.net