If you are a new entrepreneur, deciding to start a new small business can be exciting and daunting at the same time. It can be pretty stressful to calculate the costs to start a small business, secure start-up funding, and worry about the long-term profitability.
The initial investment, either from your own savings or from investors, can be significant and makes the calculating of costs critical.
The average cost to start a new small business can range from $10,000 to $30,000, and every year the costs go up.
Fortunately, there are some businesses that have a lower financial barrier when compared to others, such as micro-businesses and home-based businesses.
Here is a list of 14 different types of costs to start your small business that we have put together for you to consider when starting your company.
14 Startup Costs for a Small Business
Keep in mind that while these 14 costs to start a small busienss may not all be appreciable to you. Depending on the type of business you are planning to start, the costs of your startup may vary. These 14 startup costs are examples of the top ones that may apply to most businesses.
Before we get into the list, it is important to know a few things about determining the startup costs.
How to Calculate Your Business Costs
The best way to estimate the costs to start your business, writing a business plan is where you need to start. Your financial projections section in your plan should have an estimate of your profit, revenue, and expenses for the first three to five years.
Resources such as the SBA’s start-up costs worksheet are a great way to estimate your finances. You will know how much financing to ask for when you’re looking for start-up capital by using these templates.
The start-up costs that we are listing below are going to be recurring costs so be sure to keep that in mind. Either over a monthly, quarterly, or annual basis, you will need to cover these costs for things such as office supplies, rent, and payroll. There are other one-time costs such as office furniture and incorporation fees.
It’s a good general rule to cover six months’ worth of your expenses upfront when calculating the costs to start your business. So you shouldn’t depend on the revenue from your business to start paying for the expenses until after the early period is over. While you getting your business started, building a solid foundation, and attracting customers, you’ll want to have a financial cushion to help ease the stress.
14 Small Business Start-Up Costs to Plan For
Your start-up costs will depend on your specific industry and business, these costs will be a typical list of what you can expect.
1. Equipment: $10,000 to $125,000
You will need to finance any equipment almost immediately when starting your business. Depending on the size of your company and your industry, the cost of equipment can be anywhere between $10,000 to $125,000.
If you are starting a shipping or moving company, for example, you will have to finance a truck. You will need to have commercial-grade dishware, stoves, ovens, and cooking utensils if you’re starting a restaurant. You will need to have styling chairs if you are operating a hair salon. Almost every business will need computers.
Did you want to have your equipment purchase costs covered via govenrmetn funding? See the Funding Database for various funding options.
2. Incorporation Fees: Under $300
When setting up your business, one of the things that you will need to do is decide on a business entity, which will have legal, tax, and financial implications.
You will need to file the articles of organization or articles of incorporation if you decide to form a limited liability company or incorporate your business. The filing fee will vary depending on where your business will be located.
You will most likely have to apply for special permits or licensing even if you aren’t incorporating your business. The types that you will need will also depend on your location as well as your industry. Businesses that are in the aviation or agriculture sectors will require special federal licensing, you may need to obtain trade-specific licensing if you have a service-based business that you are starting, and a retail business will need to obtain the documentation to collect sales tax.
3. Office Space: $100 to $1,000 per Month per Employee
Whether you choose to buy or rent, having a retail or office space will be a huge portion of your fixed costs. As with other costs, this will depend on the type of space you are looking for, but you should expect to spend anywhere between $100 up to $1,000 per month per employee.
It can be more ideal for smaller businesses, and also help to mitigate the costs, if you decide to work from a coworking space or from your home. You can even travel to your clients, if you started a service-based business, to decrease your overhead even further.
4. Inventory: 17% to 25% of Your Budget
As soon as you possibly can, you will need to secure inventory to sell to customers if you are in the manufacturing, wholesale, retail, or distribution sector.
You will risk the possibility of damage or spoilage by having too much inventory, so it is important to understand how much inventory you need to carry. You will risk losing customers who don’t want to wait for items on backorder if you have too little inventory. This is especially true when your inventory will drastically vary year-round with a seasonal business.
Depending on your industry, you should allow between 17% to 25% of your budget to be for your inventory. You should consider securing more inventory when you first start your business. In the early stages of your business, you will want to generate as much revenue as possible by attracting as many customers as you can.
5. Marketing: Below 10% of Your Budget, Possibly 0%
Physical materials such as banners, signs, and business cards can be a part of your marketing budget. You should also think about paid ads, and more creative options such as giveaways and videos, that may need you to hire a video producer or a consultant.
We recommended keeping your marketing costs at a minimum. You should focus on keeping your ad materials under 10%.
Believe it or not, you can do most of your marketing for free. Advertising costs are often much lower for a business that is just starting now, thanks to social media than they were 20 years ago.
There are various government funding options to help with marketing startup costs. Access these options via the Funding Database.
6. Website: Approximately $40 per Month
You will want your website to be easy to navigate, look professional, and show the information about your products, services, contact information, and hours of operation.
Creating a website is cost-effective and easy thanks to services such as Weebly, Squarespace, and Wix. There are premium plans to use these platforms, but they can be free to use, the premiums plans will have a yearly or monthly cost:
- Wix: $13 – $39 per month for the premium plan.
- Squarespace: $12 – $18 per month billed annually, or month to month for $26.
- Weebly: $5 – $25 per month.
The Wix and Weebly content management system have a free, basic website builder. It can be easy for you to build a website using one of these services if you’re tech-savvy, there are no coding skills required. However, you should consider hiring someone to build the website for you if you’re not comfortable with computers, which, of course, will be an additional cost, but it will be an investment in your business that will be worthwhile.
7. Office Supplies and Furniture: 10% of Your Budget
If your business is operating during the traditional 9-5 office environment, all of your employees will need a chair, desk, computer, and phone. The price can add up quickly when you also add in the appliances for your break room, small office supplies, and programs such as your accounting software for your computer.
As usual, the tools your business needs to operate and the number of employees that you need to buy equipment for will determine the amount you will need to spend.
8. Utilities: Approximately $2 per Square Foot
You will be responsible for paying the gas, water, electricity, internet, and phone bills for your business in addition to the fixed costs of a down payment and rent. The average cost of your business’s utilities will be around $2.10 per square foot of your office space.
There will also be additional costs if you are planning to install HVAC units, as well as the fees to both install and maintain.
9. Payroll: 25% – 50% of Your Budget
Even during the early stages of your business, when you’re not earning much in revenue, you will need to make sure that your employees get paid. Keep in mind that your payroll expenses will include:
- Net pay
- Overtime pay
- Paid time off
The expenses for payroll will vary from business to business. An employee can cost anywhere between 1.25x to 1.4x their salary. So, for example, if you have an employee with a salary of $40,000 per year will really cost you approximately $54,000 when you take the various payroll and insurance expenses into account.
If you’re running a small business you can use 1099 contractors or you can run the business as a sole proprietor to keep a conservative payroll budget.
Get help paying for wages and payroll via government funding programs. Access the Funding Database
10. Professional Consultants: Between $1,000 – $5,000 per Year
When starting your small business you may want to take a do it yourself approach to the operations. But it will be worth the investment to work with experts and professionals.
For example, hiring an accountant can be beneficial to explain to you the different legal structures for your business, choosing a benefits program for your employees, and making sure you are fulfilling your responsibilities as an employer. They will also prepare your tax returns and help you save money on your taxes when it’s tax season.
You don’t necessarily have to have a full-time accountant. But you can consult with your accountant for general financial advice and guidance on either a monthly, quarterly, or yearly basis. You can also save yourself from major legal mistakes such as developing relationships with vendors without having a contract in place or failing to trademark a logo by consulting regularly with an attorney.
The hourly rates for an attorney and accountant will be different. The time it takes to complete a project, the level of difficulty and the number of tasks that you need them to finish, and their experience level will determine their rates and extra fees. You can save yourself some money by only outsourcing the more complicated projects and leave the easier tasks for yourself. If you look around hard enough you can even find some free options for business legal advice.
Including legal and accounting fees, most small business owners typically spend between $1,000 to $5,000 a year on administrative tasks. However, as a start-up, you can stay on the lower side by using the money-saving methods that we mentioned.
11. Insurance: $1,200 Per Year Average
The same protection that you have for your home and car will be needed for your small business. Disaster insurance to protect your business from possible fires and protection from your customers that file a lawsuit against your business are a couple of the types of insurance that you can get.
The type of business you are starting, the industry, how many employees you will hire, and other risk factors will determine the type of insurance that you will need for your start-up. As a sole proprietor, you will have a lot less requirements for insurance than a company that has hired several employees that works in construction.
The type of insurance that you should consider to protect your business and the policy costs that vary depending on several factors are:
- General liability: Approximately $400 – $800 per year. The cost of your policy will be influenced by the risk involved in your industry.
- Commercial property: Between $300 – $2,500, this is dependent on the value of the property, its assets, and the risk factor depending on the location of the property and the nature of your business.
- Workers compensation: Anywhere between $0.75 – $2.74 per $100 of the payroll, depending on the size, location, payroll, and risk of the business.
- Errors and omissions: Anywhere between $2,000 – $5,000 per year, this will depend on your business’s industry, location, size, legal history, revenue, and quality of your employee training procedure and contracts.
12. Taxes: Varies, but Approximately 21% of Corporate Tax Rate
It can be confusing to determine the exact amount that you will need to have for business taxes when planning the budget. This will depend on your deductible expenses, business entity, and revenue, which can be hard to predict.
Corporations will have to pay a flat 21% income tax under the current federal law. The income and losses will go to your personal income taxes if you’re a sole proprietor. You will be able to claim a 20% deduction on your income before paying your business taxes as a sole proprietor.
Working with an accountant will save you both time and money. They will be able to determine what you are able to deduct so you end up paying as little as possible.
13. Travel: Varies
It won’t be necessary to add the costs for travel to the start-up costs for every entrepreneur. However, you will be travelling a lot if you’re a consulting business or you have to visit your clients directly. You will also have to add the price of food, lodging, and transportation, and you will need to multiply these costs if you have travelling employees. Be sure to keep these costs in mind since they can add up fast.
We recommend that you keep your travel costs as low as possible so you can use your revenue for bigger costs such as rent and payroll. You should also consider using a travel business card to make some returns on all of that time in the air or on the road since business cards can earn you miles or point for every dollar spent. Keep the not-so-essential expenses such as business class tickets to a minimum if you have to travel quite a lot.
14. Shipping: Varies
You can probably stop reading here if you’re running a service-based business. However, you might be sending products to customers if you are in the retail sector. You will need to include the postage and materials for packing in your start-up costs. These can add up to thousands of dollars depending on what it is you’re sending.
You can save yourself some money by using services such as Stamps.com for your small business. You won’t have to buy an expensive postage meter when printing postage with this service. If you have the option to do so, you should secure some low-cost or free boxes for shipping your products from the shipping service of your choice.
How to Save on Various Costs to Start a Small Business
With many of these costs being non-negotiable, the cost of starting a small business can add up quickly. You really need to do your research before spending any money on a high-ticket item and understand that there are cheaper ways to handle some of these expenses.
You can use software such as QuickBooks, for example, and save on the costs of hiring a bookkeeper. You can save yourself from the costs of leasing office space by working in a co-working space or from home. Also, use social media as a cheap way of marketing your new business.
It will, however, be worth the investment to make certain purchases no matter the cost. Just because it’s cheaper to buy poor-quality equipment doesn’t mean that you should, you will lose both money and time when you have to make repairs and end up buying new equipment anyways. If you become confused anywhere along the journey to start your small business, you can hire an accountant or legal professional. Also, make sure that your advertising campaigns and website are effective and look professional.
You should understand that there are a lot of resources out there to help you find financing for your start-up if you have calculated the costs of your start-up and feel a bit overwhelmed.
Your first round of funding will more than likely come from a combination of equity and debt financing. However, debt financing options such as small business loans are pretty limited for a brand new business. Most start-up businesses won’t have any profitability or healthy credit, which lenders will look for when giving loans to more established businesses.
You don’t have to rule it out as a viable option since there are lenders that are comfortable working with start-up businesses.
Also, you may want to consider a grant to fund your business. There are plenty of programs that will fund your business if your business meets their requirement, you just have to know where to find them. Luckily we have a funding database that has a wide array of funding that you can consider for your business. The best part is, you don’t have to pay the money back with most grant programs.
Get a Business Credit Card
We recommend that you start applying for a business credit card once you have established a legal entity for your small business.
It is usually easier to qualify for a business credit card than a traditional loan, the application is easier too. You will also have access to a higher limit than a personal credit card. If you wish to maintain your personal liability after you have formed a corporation or an LLC, a business credit card keeps your business and personal finances separated.
You will need to make sure that you are not maxing out the limits of your business credit card or charging more than the business can repay. Either one can hurt your credit score, which can hurt your chances of ever securing a loan down the line for your small business.
- What is the average cost for a start-up?
This will depend on the type and size of the small business that you’re opening and the industry that you’ll be operating in. For example, starting a social media consulting business can cost less than $10,000, while opening a franchise with McDonald’s can cost $1 million.
- How to calculate the costs?
Using a budget template will be the most straightforward way to calculate your costs. Your start-up costs will be broken down in your budget along with your recurring expenses.
You should build a financial cushion to cover the first six month’s worth of business expenses to support you in the early stages of your business when the profit margins may be slim.
- What is considered a start-up cost?
Any expenses that need to be paid when starting a new business is a start-up cost. This can include incorporation fees, taxes, insurance, payroll, and equipment.
Typical costs of a start-up will vary from business to business depending on your industry and type of business, one companies expense won’t apply to other businesses. For example, an online home-based consulting business won’t need to pay rent to a separate business location like a brick-and-mortar business will need to pay.
One of the most stressful parts of being an entrepreneur and starting a small business will be planning the budget for your business. But it will go a long way to getting your company started by being realistic about the costs to start your business and how much money you may need to borrow.
The most important thing about the costs to start a small business is that you can get funding from government sources to cover most of them. By accessing the Funding Database, you can see over 1,000 different govenrment funding options.
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