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You need to spend money to make money — but just how much depends on the type of business you’re looking to start, on top of other factors. Estimating the different costs you might incur can help you apply for financing that truly meets your business’s needs.
How much does it cost to start a new business?
It costs around $31,000 to start a business, according to a 2009 survey by the Ewing Marion Kauffman Foundation. How much you actually pay depends on your business type, where you’re located and the equipment and supplies you’ll need to get up and running. For example, it will cost much more to start a new restaurant than it will to start a freelance photography business out of your home.
How to calculate startup costs for a small business
Calculating the cost for a startup is relatively simple — you just need to add your estimated expenses together to get a full picture of what your budget should look like. The Small Business Administration (SBA) has a helpful worksheet you can use to calculate the funds required to start your business.
8 common startup costs
While your specific costs will vary, these are the eight most common factors to consider when deciding how much you’ll need to borrow:
In most states, registering your business as an LLC, C-corporation or S-corporation costs under $300. But licensing and permit costs can vary, so it’s best to meet with an accountant and attorney to guide you through the process. Just be sure to work their fees into your budget as well.
Renting or buying office space is typically one of the larger fixed expenses your new business will face. On average, you can expect to pay $4,000 to $15,000 per employee every year. To reduce this cost, you may want to consider working from home or out of a coworking space for those first few months you’re just getting started.
Once you’re ready to expand into an office, take the cost of rent, utilities and taxes into account as well as any changes you plan on making to the layout of the office. The rent you pay will largely depend on where your business is located. While larger cities are often more expensive, they may offer more amenities and easier access for your employees.
The equipment and supplies you need will vary greatly depending on the type of business you plan on opening. Because of this, it’s critical to do your research.
You’ll likely need to finance some of your equipment, so prepare a budget and a solid business plan so you can present it to lenders. And if you plan on hiring a few employees, keep in mind they’ll need their own equipment and supplies, too.
You’ll have no concerns about inventory if you provide a service. But any business involved in retail or manufacturing will need to calculate their inventory costs.
To create a budget, work backward from your revenue goal. Use the price you plan on selling your inventory at and how much you realistically plan on selling in a year to help guide you.
Payroll should cover more than just an hourly salary. Consider benefits, employment taxes, commissions, overtime pay and bonuses when calculating your startup budget.
Because it varies widely across the country and by industry, there’s no set number to keep in mind. Instead, you should be prepared to dedicate a significant portion of your budget to payroll at first.
Remember: You also need to be paid, so be sure to account for your own wages when determining employee costs.
The average cost of business insurance is $1,281 per year, according to a 2017 survey by business insurance provider Insureon. However, this data is based on policies serviced solely by Insureon. Your costs will likely vary depending on where you’re based, your business’s risk profile and the provider you choose.
If you plan on using an online platform like WordPress, Wix, Squarespace or Weebly, you’ll likely only need around $30 to $40 per month to register a domain and create a website for your business. As for marketing, most of these costs can be reduced by simply using social media and other free brand-building platforms. If you want to create flyers, buy ad space on Facebook or print business cards, limit your expenses to 10% of your budget.
If your business is registered as a corporation, you should expect to pay the current federal corporate tax rate of 21% of your revenue and any corporate taxes charged by your state. If your business is registered as a sole proprietorship, LLC or partnership, your taxes will be accounted for in your federal and state income taxes.
The costs can get tricky, though. Rather than calculating them on your own, contact an accountant to ensure your business is following all regulations. It can help save time and money now — and some headaches down the road.
How can I finance initial startup costs?
While your options are limited compared to businesses that have been around for a while, you still have a few ways to finance your startup:
Equipment loans. If your business requires equipment to get up and running, equipment loans allow you to buy necessary machinery.
Business credit cards. To help build your business’s credit and finance smaller startups costs, you may want to compare small business credit cards. Some even offer 0% intro APRs for the first year — giving you some breathing room to pay off expenses slowly over several months.
Personal loans. Some banks and online lenders allow you to use a personal loan for business expenses. However, you’re typically limited to borrowing $50,000 or less.
SBA loans. If you’ve exhausted all other options, you might want to look into a government-backed loan from the SBA. These are small loans up to $350,000 with competitive rates and terms. The application process can be long and arduous, though, so expect this to take a few months from start to finish.
Compare your business loans options
Updated October 19th, 2019
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Bottom line
From equipment and inventory to payroll and office space, funding the cost of your startup can put a huge dent in your personal finances. Before you dig into your savings, compare business loan options that might work for your new company.
Survey costs. The research needed to start a business — like market analysis and potential locations.
Preparation costs. Any money you spend before opening your business may be tax-deductible. This includes employee training, attorney and accountant fees, travel expenses and advertising.
Setup costs. The cost of registering your business as an LLC or corporation, including legal, state and filing fees.
A startup budget includes some initial operating costs, like rent and marketing. But overall, your operating budget will be what you create year after year as your business grows — it won’t include starting expenses like licensing fees.
Kellye Guinan is a writer and editor with Finder and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.
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