Every year thousands of perfectly intelligent Americans jump into new business ventures without doing all their homework. Oh sure, they’ve tested the market and created a business plan. They’ve lined up a lawyer and accountant, purchased equipment and set up a Web site. But even though they may think they’ve covered all the bases, surprise expenses pop up in the most unusual places.

Consider the odds: A whopping 56 percent of new employer businesses disappeared by their fourth year, according to SCORE, a nonprofit entrepreneurial education association that analyzed a group of small-business studies.

It’s enough to give aspiring entrepreneurs pause.

Bankrate asked small business owners about the unforeseen costs that threw them off their game. Then we asked experts for strategies on how to avoid or minimize these unexpected expenses.

1. Your business runs on an expensive commodity

Fred retired to open his dream business: a personal concierge service. He operates out of his home, saving on office expenses — that’s a plus in his favor. But the business, which offers everything from personalized grocery shopping to ferrying the kids to soccer practice, is losing money faster than a politician forgets a promise.

The reason? Fred launched shortly before gasoline prices started rising. Not only does the gas he uses keep him from making a profit, but would-be clients are cutting back on luxuries — like Fred’s services. And to keep his business afloat, Fred maxed out his credit cards and went more than $10,000 in debt.

While it’s true Fred couldn’t control the cost of fuel, all the signs of rising gasoline prices were present when he opened. Blinded by the excitement of being his own boss, Fred simply refused to take a realistic look at his prospects of success. He also invested heavily in such business equipment as a new computer, fax machine, copiers and supplies, as well as marketing materials. Fred’s failure to see the viability of his business venture before making the leap led to a nasty surprise.

Expert advice: Julie Lenzer Kirk, who teaches entrepreneurship at the University of Maryland and is the author of “The ParentPreneur Edge: What Parenting Teaches About Building a Successful Business,” says you can avoid Fred’s fate by saving a minimum of three months’ worth of personal and business expenses.

“Regardless of the business, it generally takes longer to make money than most entrepreneurs think,” Kirk says.

Taxwise, Fred may be in better shape. Joseph Anthony is an enrolled agent — a tax preparer and consultant authorized to appear before the IRS — in Portland, Ore. He specializes in tax planning for individuals and businesses. Anthony says the good news for Fred is that his success or failure has nothing to do with his tax situation.

“If he entered into and works at his business with the intention of trying to make a profit, then all of the expenses related to being in business are going to either be deductible or depreciable,” Anthony says. “Government doesn’t punish you for being a bad business person. They punish you for trying to deduct expenses that are not business expenses or claiming you have a business when what you have is a hobby.” 

2. Even the tiniest delay at launch can cost big bucks

Steve Mock, CEO of Giftventure.com, says early feedback from user trials of the online company’s Web site complicated its launch. The result: a six-week delay in going live.

The cost associated with the delay included all the other (expenses) in my company,” says Mock. “Our customer service person, for example, was (paid) for six weeks and we didn’t have any customers since we didn’t launch.”

Expert advice: Darrell Zahorsky, small business information guide for About.com, and author of an upcoming book on starting a small business to be published by Adams Media, says to prevent startup costs from spiraling out of control, entrepreneurs should:

Tricky business
  • Launch under the radar: “All launches should have a pre-test or beta phase,” Zahorsky says.
  • Test your systems by inviting family, friends and neighbors for a pre-opening sale if you have a brick and mortar retail business.
  • Send out special offers to a select e-mail list to visit your site prior to launching a virtual store.

“Remember the three-by-two rule: Any new launch or startup will take twice as long and three times the cost than assumed,” Zahorsky says. He advises new business owners to plan for contingencies. “Every entrepreneur has high hopes and expectations, but smart entrepreneurs prepare for the downside.”

3. Businesses pay more for the same services as residential customers

James Hills, president of marketinghelpnet.com, says that when he and his wife moved their small company out of a home office and into a “real” one, they were astonished at how much more the same level of service cost once it went commercial. Hills says his Internet contract alone increased from $49 to $79 for the same basic service. Phone fees also increased.

Expert advice: When looking at business options, analyze your anticipated use, and then look for cheaper alternatives. Kirk says Voice over IP, or VoIP, phone services offer big-company benefits at a fraction of the cost.

“One of the drawbacks of VoIP is that if you lose your Internet connection, you also lose your phone,” Kirk says. “(VoIP) isn’t recommended for those without reliable service.” She also points out that using a lot of bandwidth can result in degradation of call quality.

4. Minimum-use fees can subtract from the bottom line.

Associate Publisher Scott Anderson of Ceres Press says he was unpleasantly surprised to find that not using his private shipping service enough has its consequences. “(The service) has a minimum charge that we must pay every week,” Anderson says. That fee’s due even if they don’t ship anything. Although the amount — $8 to $17 a week — may not seem like much, as Anderson points out, it adds up.

Expert advice: Read the fine print and find services geared to small businesses. Stacy Robin, business consultant and managing partner of The Degania Group, says to check out associations and credit card benefits, which sometimes offer member discounts on many expenses, including shipping. And realistically weigh your options: Robin says that unless you’re shipping on a regular basis, a contract probably isn’t necessary.

5. Too much physical inventory can spell fiscal disaster.

Jimmy Beans Wool founder Laura Zander says the yarn company saw a real growth spurt in 2005. That was great, but because wholesalers price wool in bags of 10 and Jimmy Beans sells it by the ball, the company was inventory heavy.

“What we didn’t realize is that we had to pay taxes on that increase in inventory (minus the growth),” Zander says. She adds that expanding the inventory at the same rate as revenue would have solved the problem. Instead, the company accrued so much in inventory taxes that “we basically had to pay almost all of our salary that year back into taxes.”

Expert advice: Zander’s dilemma isn’t uncommon. Kirk offers this advice: “If your business is seasonal, look at how you have your fiscal year defined. If you typically build up your inventory toward the end of the calendar year, consider moving your fiscal year end to a time when your inventories are lower, like September. That way you’re not penalized for a needed build-up.”

Stacy Robin says that some real-time inventory management systems enable business owners to order goods at the same rate as they’re sold. “(That helps to) limit the gap between the time you lay out the cost for the product until the time you get paid,” she says.

6. Getting your goods into retail outlets isn’t all profit.

If you want your handbags at Saks or your chutney in Trader Joe’s, you’ll have to do more than sell the company reps. Prepping a product for retail entails numerous expenses you probably haven’t thought about, like establishing UPC or bar codes. Stacy Dallman, founder of Nookums, which manufactures a line of baby pacifiers, says it cost $750 to establish UPC codes so her items could be sold in the U.S. and Canada. Dallman says: “Every variation of your product needs its own (bar code).”

Expert advice: Some initial expenses are unavoidable. This is one of them, but you can control additional costs by investing in software that prints the barcodes instead of having to contract out for the work, says Kirk.

7. Self-employment taxes can be staggering

Have a good year? Uncle Sam will be delighted. That’s because self-employment taxes accrue at a rate that will leave you gasping for mercy. Employers generally match your employment taxes of 6.2 percent for Social Security and 1.45 percent for Medicare. The self-employed get to foot the whole bill: 12.4 percent for Social Security and 2.9 percent for Medicare.

Expert advice: Tax expert Anthony says: “You get to deduct one-half of the self-employment tax as an adjustment to income (which) reduces total income.” Anthony adds that this deduction does not come off your Schedule C (on which you report your business profit and loss) since it is not considered a business expense.

The only way to legitimately reduce the amount of employment taxes you owe is to earn less money or incur higher expenses.

8. Not all insurance policies cover all disasters

When Anthony Colleluori’s law office burned down, he had to find a new place to do business on a moment’s notice. It wasn’t easy locating adequate space for his practice and staff of four, but he had to have an office to see clients and try and rebuild his record-keeping system.

Back in 2005, Kevin Katechis, a partner in Green Cream company,had a close brush with Mother Nature that almost put him out of business. In the process of moving operations of Green Cream (a skin care product manufacturer) to New Orleans, Katechis and his partner warehoused $750,000 worth of inventory there. Because Katechis was busy relocating his family, he set up a meeting with his insurance agent for August 29th, leaving the inventory uninsured for four short days. When a hurricane was sighted in the Atlantic, Katechis wasn’t unduly worried, but when predictions it might hit New Orleans started coming in, he rented a truck and moved the inventory back to Alabama. Katrina totally destroyed Green Cream’s warehouse. “Had we lost the inventory, I would be bankrupt,” Katechis says.

Expert advice: When it comes to situations like the fire that hit Colleluori’s law office, the National Association of Insurance Commissioners says entrepreneurs should make sure their policies have business interruption and extra expense coverage to help them keep their businesses running while they rebuild.

For natural disasters like the one that nearly wiped out Katechis’ inventory, the NAIC says to check with your state’s insurance department or a trustworthy agent who specializes in insuring businesses for advice on how to secure coverage for hurricanes if your policy excludes wind damage from a named storm (and other disasters). You also likely have a state-based insurance option to consider. If your policy doesn’t cover floods, you might take a look at coverage from the National Flood Insurance Program.

These are only a few surprises to consider when planning the leap from employee to self-employed. There are tons of others, including the expense of marketing materials, legal advice fees for patent protection, and the cost of doing business in one state versus another. To really be prepared for the unexpected, talk to other small business owners in your industry and ask them: “What expenses surprised you the most as a small business owner?” The answers could help you avoid costly mistakes in those critical first years.