How Much Does It Cost to Start a Business

Startup costs are always a key consideration when starting a new business. Figure out how much yours will cost with this detailed guide.

Understanding your startup costs can be overwhelming. The figures vary from industry to industry and business to business.

And if you can't track your finances accurately, your business could be in trouble. Or worse, it could fail.

Fortunately, with the right sources, you can estimate your startup costs. Building a habit of keeping a detailed budget will also give your business a better chance at success.

Keep reading to learn more about the different startup costs and how to reduce them.

How much money do you need to start a business?

On average, you need around $30k to $40k to start a business. But some business ideas only require $10k or less.

Multiple factors determine how much capital you need to start a business. For example, your platform matters. Online companies generally have fewer startup costs than brick-and-mortar ones.

Estimate your business costs by adding your initial expenses to CreditDonkey's Business Startup Calculator below.

Your niche or industry also plays a part. For example, if you're building a tech app, you could have much lower costs than if you are starting your own restaurant.

Whether you hire employees or not can also impact your startup costs. And the more people you hire, the more you'll need.

Common business startup costs

Startup costs differ in every industry. But here are a few common ones you should prepare for:

• Business registration fees, licenses, and permits
  You typically need to choose a business structure when starting a business.

  Most businesses begin as sole proprietorships. But registering yours as an LLC can offer many benefits, including limited liability protection and increased credibility.

  If you choose to form an LLC, you need to consider the filing fee as part of your startup costs. LLC filing fees vary from state to state, usually from $50 to $150, although it can be as high as $500 in some states.

  Want to reduce your startup costs? LLC filing fees are a tax-deductible business expense. This is one way to reduce costs to formalize your business structure.
  

  But even if you stay as a sole proprietor or partnership, you still need to consider business permits and licenses in your budget.

  Like LLC filing fees, the amount you need to pay will differ in every area. And you might need permits/licenses on local, state, and federal levels, depending on your specific industry.

• Equipment
  Equipment costs are another major consideration when starting your own business. And it can take up most of your budget, especially if you need specialized equipment.

  Depending on your industry and the scale of your operations, equipment can cost anywhere from $10k to $100k+.

  Leasing equipment can be a more cost-effective alternative if you have a limited budget. But you also need to consider other factors like down payments, interest rates, and insurance costs.

  The average interest rates for leasing business equipment are from 5% to 15%. Factors like your credit score can impact the exact rate you receive.
  

• Inventory
  You also need to consider the costs of your initial inventory, especially if you're in the retail industry. Having some of your items on hand is best to quickly fulfill customers' orders.

  In general, it's a good idea to allocate 17% to 25% of your total budget for inventory. Just make sure you don't over- or understock your items.

  Overstocking can mean getting stuck with items you can't sell. And understocking can mean losing potential customers if you can't fulfill their orders immediately.

• Office space
  Like equipment, office expenses could take up a large chunk of your budget. Or if your team is online, it could cost nothing almost nothing.

  Location is a key factor in the price. Busier areas are generally more expensive than somewhere with less foot traffic. Its size matters, too, especially if you hire employees.

  That said, the average cost for commercial spaces is around $38 per square foot.^[1] But this can be more expensive in some cities, like New York or San Francisco.

  If you're renting, you can still expect to pay around $300 to $1,000+ per month on average.

  If you need the space long-term, consider signing an annual lease to reduce the overall amount you must pay.
  

• Utilities
  You'll need to consider utility costs if you have a physical space for your business. This usually means gas, electricity, water, and phone/internet bills.

  Like the space itself, location and size matter. The average utility costs for commercial spaces in the U.S. are around $2.10/square foot. Some areas may charge higher rates, especially if you have a larger office.

  Utilities are an ongoing cost that you need to regularly budget for. Later, we'll talk about the different types of business startup costs and their differences.

• Technology and software
  Investing in business software solutions, like payroll and bookkeeping services, can also help you manage your business.

  They automate and simplify many administrative processes, so you can focus on other aspects of your company.

  For example, payroll services can ensure you're paying your employees correctly and on time. On the other hand, bookkeeping software can help keep your financial records well-organized.

  You might also need to consider Point of Sale (PoS) software if you're in the retail industry.

  Read more: How Much Does a Point of Sale (PoS) System Cost?
  

  That said, the price for each one varies. And it's usually determined by factors like features and the number of employees.

  Most services charge a monthly base fee and a per-employee fee. Of course, there are free options available. But these usually have more limited features compared to paid subscriptions.

  Overall, it's best to allocate around 3% to 6% of your regular budget for these tech programs.

• Insurance
  Insurance is another startup cost you have to consider, regardless of your business structure or industry.

  There are different types of business insurance policies you can get. Some examples include general liability insurance, business owner's policy, workers' compensation, and commercial property insurance.

  An insurance policy can protect you and your business if something goes wrong (e.g., fires, natural disasters, lawsuits, etc.). But they can be costly, especially if you need comprehensive coverage or have a lot of employees.

  That said, the average cost for small business insurance policies is around $400 to $800 per year.

• Taxes
  Paying taxes is a requirement for all businesses, especially those wanting to retain their good standing with the government.

  If you're a sole proprietor or partnership, you don't have to pay corporate income tax since the IRS considers these pass-through entities.^[2] That means you only have to pay taxes on your personal income tax returns.

  The tax rule about pass-through entities also applies to LLCs since these are taxed as sole proprietors/partnerships by default.
  

  But if you choose a C- or S-Corporation tax classification, you have to pay income taxes on individual and corporate levels. Corporate tax rates usually differ in every state. But the federal rate is currently fixed at 21%.^[3]

  Besides income tax, your business might also need to pay the following taxes:
  

  • Payroll and employer taxes
    
  • Self-employment tax
    
  • Property tax
    
  • Sales tax
    
  • Excise tax

  You can check the official IRS website to learn more about the different types of business taxes.

• Website
  A company website can be a good idea, even if your business isn't online. It will make it appear more professional and make it easier for customers to learn more about your products/services.

  You can create a website for free. But like free business software, this option is usually more limited. And it might not work long-term, especially if your business expands.

  In general, you can expect to pay around $1,500 to $15,000 to build a small business website.

How to determine your startup costs

Figuring out how much you need to start your own business can be tricky, especially since you must consider multiple factors.

Here are some tips to help you figure out your startup costs:

Research your industry expenses
As mentioned, different industries have different startup costs. You may need special equipment or permits in some cases before you can start a business in that field.

So it's best to research the one you're entering to understand what business startup costs you must prepare for.

Understand the different types of costs
It's also a good idea to familiarize yourself with the different types of business costs. Doing so can help you prioritize and budget more effectively.

Business costs generally fall under these categories:

• One-time vs. ongoing
  One-time costs are business expenses you only need to pay once. Some examples are:
  • Business registration fees
    
  • Renovations to your physical shop
    
  • Equipment costs
    
  • Etc

  Ongoing costs are expenses you need to consider and budget for regularly. These usually mean:

  • Utility bills
    
  • Monthly rent
    
  • Employee salaries
    
  • Taxes
    
  • etc

• Essential vs. optional
  Essential costs are non-negotiable business expenses. That means you must always set aside enough room in your budget for these expenses. These include:
  • Equipment
    
  • Insurance
    
  • Inventory costs

  Optional costs are ones your business can benefit from, but you don't really need. For example, marketing campaigns can help your business expand its reach. But your business won't fail without one.

• Fixed vs. variable
  Fixed costs are business expenses you can expect to stay the same for a certain period. For example, software subscription fees, rent, and basic supplies usually cost the same monthly.

  Variable costs are trickier to plan for since different factors can impact its price. Some examples include:
  

  • Raw material costs
    
  • Delivery rates
    
  • Credit card fees
    
  • Etc

Break down and estimate your costs
Once you understand the different categories, your next step is to list your business needs and their average costs.

You can start with the most common ones or those you've already incurred, like equipment and business registration fees. Doing this can give you a clearer picture of your startup costs and budget accordingly for each one.

Then, compare your list with your budget and estimate how much you must set aside for each expense based on their average cost and priority.

How to save on your startup costs

Starting your own business can be expensive. But you can save significant money with a keen eye on your finances.

Here are some tips you can try:

• Do the work yourself whenever possible.
  Handling tasks yourself instead of hiring someone else can lower your startup costs. You can also use different business software to simplify them and save time and money.

  For example, programs like QuickBooks Online are more than enough to handle most small business accounting needs. So you no longer need to hire a dedicated accountant.

• Buy in bulk.
  Whether it's office supplies or manufacturing materials, you usually can save more if you buy things you regularly need in large quantities.

  Suppliers also sometimes offer additional discounts for bulk purchases from repeat buyers. So ask yours if they have one to get a better deal.

• Consider getting financing.
  Paying for everything out of pocket can be tricky. And you wouldn't want to go bankrupt before your business even takes off. Fortunately, you can reduce the amount you have to shell out by getting a small business loan.

  Small business loans can help finance some aspects of your venture. So you don't have to pay for everything with just your savings.

  Read more: How to Get a Small Business Loan
  

  Just note that there are different types of small business loans. So do your research beforehand to determine which is best for you.

  Alternatively, you can also get a business credit card to cover some of your expenses. It can also help you build your business's credit score.

• Make the most of tax deductions.
  You can also reduce the impact of business expenses on your finances by maximizing every tax deduction you can.

  Some examples of tax-deductible business expenses for small businesses are:
  

  • Inventory costs
    
  • Business insurance costs
    
  • office supplies and furniture

  Just remember that not all business expenses are tax-deductible. So make sure you do your research or consult with an expert before you write it off as one during tax season.

  You can also read more about tax-deductible business expenses on the IRS' official website.

Bottom Line

Starting your own business can be daunting, especially considering how much it costs.

But understanding the different startup costs is still important because it can help you create and stick to a clear budget.

And this, in turn, can help you avoid the common financial pitfalls new businesses experience. It will also give your business healthy finances you can build on for years.

References