Aspiring entrepreneurs have to consider what it takes to bring their business idea to life:

• How much time to put in. 
• How much money to invest to make it work. 
• Not to mention, the planning and revenue forecasting you’ll do to make your company viable. 

In the planning phases of your startup, utilizing business credit to fund major expenses isn’t an option yet. So you need to know where the money will come from. 

Any business owner will tell you it’s not easy, but it’s an exciting time for sure. That excitement might be overshadowed by reasonable worries that most small business owners have. 

Is the business going to be profitable? Can you afford the expenses of running a startup? How much savings is enough before making the leap? We’ll go over these questions plus some of the common startup costs for small business owners. 

How Much Does it Cost To Start a Small Business?

Major determining factors in the cost of starting a business are size and which industry you’re in. Microbusinesses and home-based businesses have the lowest startup costs with an average of $2000 to $5000.

Since e-commerce sales are expected to hit $4.8 trillion this year, it makes complete sense to start an online business. The potential for high profit and low overhead make it more appealing than traditional business models. 

You can nix the spending on office furniture, equipment, and office supplies. Instead opting to spend minimal cash on a business license, incorporation, internet service, and a website. 

In dropshipping businesses, owning the business doesn’t even require you to carry your inventory. Thus making it a popular choice for new business owners. 

Is a physical storefront more your speed? 92% of retail sales still happen in person. If you’re starting a restaurant, coffee shop, boutique, or consulting firm, you still need to invest in the basics. 

Larger operations requiring heavy equipment or office space need more funding to get started. There’s no average amount to budget for these business models since the expenses depend entirely on your industry and the individual needs of your company. 

A construction company purchasing heavy machinery and building materials is going to have much higher business startup costs. Meanwhile, a coffee shop purchasing espresso machines and refrigerators will likely have much lower initial costs. 

It’s important to research and develop a budget to understand how much financing your new business will need. 

How to Calculate the Cost of Starting a Business

When calculating how much you need to start, there are a few different types of expenses you’ll have to consider. The first types are fixed and variable costs. Fixed costs don’t change from month to month. They include expenses like: 

• Rent for a storefront or office space
• Business insurance
• Business loan payments

Variable costs will change each month depending on how much you use. These are bills such as: 

• Utilities
• Inventory
• Payroll

When budgeting for these types of operating expenses, it’s best to round up your estimated variable costs to avoid coming up short. It can also be helpful to round down your revenue projections for the first year in case you run into some hiccups. 

You should also take your one-time expenses and recurring expenses into account. Your one-time costs are usually a major upfront purchase like buying furniture or putting a security deposit down. 

Ongoing costs are paid on a regularly recurring schedule. Basically, anything you pay for more than once. Most times these line up with some of the fixed and variable costs mentioned earlier. 

To help you budget the cost of starting your business, the Small Business Administration (SBA) put together a Startup Cost Worksheet where you can edit and customize a basic budget for your business startup costs. 

Business Startup Costs Examples

These are just a few general examples of startup expenses. It’s not a full list and there might be costs specifically for your industry that aren’t mentioned here. You’ll have to do some additional research to make sure you’re not leaving anything out. 

Business Registration Fees

Entrepreneurs have to meet the requirements for running a business by state and federal standards. If you’re not operating under your legal name, you’ll have to register as a sole proprietorship, LLC, general partnership, or corporation. 

Registering your business gives you added liability protection and advantages when you file business taxes. You can use the SBA’s guide on registering your business for more information. 

In most cases, the initial fee to incorporate your business is about $300. Depending on which state you’re registered in, that filing fee can be more or less expensive. The good news is it’s not something you have to worry about paying monthly. It’s typically a one-time or annual fee. 

Even if you’re not in an industry where you need a registered business name, you’ll probably have licenses you’ll need to get and keep current. This is the case for many service industries like hairstylists or therapists. 

Purchasing Business Insurance

You’ve spent a lot of time developing your business idea and building things from the ground up. The last thing you need is a natural disaster, but they’re unpredictable. That’s where insurance comes into play. 

Whether you’re thinking of the company vehicle or protection against theft and fire, business insurance comes in handy.

Having insurance protects your business from damages and losses related to disasters, making it easier to rebuild when you’re ready with an insurance payout. 

Catastrophes can be the least of your worries. There are other more common risks with running a business than having insurance coverage. 

Business insurance helps protect you from:

• Legal issues with customers and excessive legal fees
• Workplace injuries
• Commercial real estate risks
• General liability
• Employee errors 

Business insurance costs depend on the size of your company and the types of risks you face in your industry. On average, you’re looking at about $1,200 annually for business insurance. 

It’s less if you’re a sole proprietor running an online business compared to a small business with 50 employees.

Renting an Office

Renting space to work from is an essential, yet expensive, part of your startup budget. Buying real estate outright is too big of a financing commitment in the beginning compared to renting. The total cost of renting office space will depend on a few factors:

• Location
• Number of employees
• Type of space needed (restaurant, office, or retail)

On average, an office space can cost anywhere from $100 to $1000 per employee each month. So if you need an office space for ten people in a prime location you’ll be budgeting up to $10,000 a month in rent. 

Many successful businesses have minimized these real estate costs by using coworking spaces like WeWork to hold meetings with clients or provide employees with office space. It saves on the huge upfront cost of buying furniture and covering utilities without compromising on location. 

Service businesses have the added benefit of choosing between being home-based or even traveling to their clients. That eliminates the office expenditure until your business is bringing in more revenue. 

Website

Even if you’re selling products and services in person, you still need a website to promote your business. Before customers set foot in your store, they’ll often visit the website ahead of their trip and it becomes the first introduction they have to your business. Make it count! 

If you’re experienced in web design, you might get away with doing a free WordPress, Wix, or Weebly website. Shared hosting sites like these and Squarespace are great tools for building websites to act as a digital space to buy products, make reservations, or get more information. 

A sleek website design with top-tier features can run you anywhere from $200 to $2000 depending on your needs. The previously mentioned service providers also offer monthly plans ranging from $5 to $40 if the annual payment is too big of a commitment. 

If you’re not tech-savvy, it’s best to pay someone to help you design your website. You’ll also want to pitch in for website maintenance to keep everything running smoothly. 

Consider it money well spent. The majority of consumers opt to find products and services online first – even if they plan to do their shopping in person. 

A website isn’t the only marketing tool you have at your disposal. You can also use social media to your advantage for free. No need to increase your marketing costs. With a well-thought-out marketing strategy, you can get your startup in front of the right customers. 

Hiring Employees

Hiring skilled labor is one of your biggest expenses as a business owner. This expense makes up 25% to 50% of your total budget. Small business owners often try to tackle everything on their own to save a buck, but there aren’t enough hours in the day for that. 

The fact is, it’s more efficient to hire someone who specializes in the tasks you don’t want to do or don’t have time to do. The sooner you realize you can’t do everything yourself, the better. 

It’s smart to outsource your bookkeeping, taxes, and legal matters to consultants. From there, you can hire regular employees for the daily stuff. Be sure not to neglect the employee-related expenses in your budget planning. Include projected amounts for:

• Overtime
• Medicare
• Vacation time
• Bonuses
• Commission
• Other employee benefits

Even if you’re not bringing in tons of revenue yet, you still have to pay your employees. Independent contractors can be a temporary solution if your revenues aren’t consistent yet.

Equipment and Supplies

Businesses based online don’t need much of an inventory to start. Typically there’s no need for heavy equipment, and supply costs will be at a minimum.

Planning to open a restaurant? Prepare to put together financing for large ovens, stoves, or other specialty cookware. Depending on what’s needed for your business, you might need $10,000 to $125,000 worth of equipment. 

Even if you can’t afford to purchase the equipment outright, looking into equipment financing options can help you get the doors open.  

How Much Money Should You Have Saved Before Starting a Business?

Until you develop solid business credit scores to secure loans, you’ll need to lean on your savings or other means to get started. The budget you develop for your business is going to determine how much you need to have saved up before making the leap. 

You also need to evaluate your personal budget to ensure you’ll at least have the necessities while getting things running. It’s suggested to have at least three to six months of your personal and business expenses saved up. 

Three to six months is the minimum, but it would be far more helpful to have a year’s worth. The more you have saved up, the less pressure you’ll be under. 

To close out, starting a business can be an expensive undertaking. It’s best to prepare with a budget that leaves room for flexibility. When you’re just getting started, some of your initial necessities, like inventory and supplies, can be bought with a good business credit card.

Invest the time it takes to build a business credit score and support your business with a savings account until you can utilize other options. Loans and equity financing can cover larger purchases once you’re ready to expand. 

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