12 Small Business Startup Costs You Should Expect
Business startup costs can add up quickly. You’ll likely need to invest in equipment, inventory, payroll, software, and office space, just to name a few expenses. Plus, you’ll also have to pay for permits, marketing costs, and any needed legal fees. Unfortunately, it’s common for new business owners to haphazardly jump into planning without considering if they can afford all their business’s startup expenses. This often leads to the business being unable to sustain itself.
If you aren’t meticulous about financing planning at the beginning, you could risk your business’s future. In this post, we’ll examine how to estimate startup costs so that your business can become a success!
Startup Business Costs to Expect
1. Research Expenses
Prior to starting a business, you could conduct market research about your prospective industry. Some startups neglect this step, which causes them to be unprepared or unable to execute their ideas. To avoid this, consider hiring a market research firm to assist you in the assessment process. Of course, following this route will mean that you’ll have to pay these experts, so include this in your budget.
Most new businesses will have an immediate need for equipment. For example, if you start a moving company, you’ll need to purchase a truck. Or, if you open a restaurant, you’ll need stoves and other kitchen equipment. Depending on your industry, the equipment can be costly, especially if you have multiple employees who need their own equipment.
Luckily, there are numerous types of equipment financing available, ranging from loans to leases to lines of credit. If you’re concerned that you won’t be able to afford necessary equipment, you might benefit from applying for equipment financing to get you started. Regardless, if your business will require equipment, this should be considered among the most important of your startup expenses.
When starting a business, you’ll need to choose a business entity, which will determine the way your taxes are structured. For instance, if you incorporate your company, it’ll be a separate legal entity, and you’ll need to file articles of incorporation with your state. This comes at a cost.
We suggest reviewing the Small Business Association’s (SBA) state-by-state breakdown to determine how much it’ll cost to incorporate a business in your state. Even if you skip this step for now, you’ll likely need to register and apply for federal or state licensing and/or permits. The specifics of this will depend on the type of business you’re operating and where you live. Some businesses, like those in the agriculture or aviation industries, require federal licensing, while service-based industries like hairdressers and dentists need to have professional licenses.
If you’re unsure of how your business’s industry is categorized, check out the SBA’s guide on licensing and permits.
4. Office space
Regardless of whether you rent or purchase a business location, it’ll be fairly expensive. Due to this, many small business owners operate from their homes in the beginning. If you’re low on cash, this might be your best option to start.
If you get locked into a long-term lease, you could be paying a considerable amount of money. Plus, you’ll have to factor in utilities and other operational costs. Even if you can afford it, a typical lease can take months to get set up, and you’ll need to negotiate a lease, design a layout, buy furniture, and set up equipment prior to opening your doors. It’s also important to note that you may need to start paying for rent prior to starting your business. Thus, if you put down a security deposit and pay rent prior to opening your business, that is considered a startup expense.
Workspaces, also known as co-working spaces, are another popular option that you could consider. They are much more affordable, and are set up and ready to use from day one. Many of them are complete with furniture, Internet, printers, kitchens, meeting rooms, and other amenities. If something goes wrong, such as a printer jamming, the co-working space usually has staff there to fix it. You can join one space or use co-working membership apps such as Croissant that are similar to WeWork, which allow members to work from multiple locations, but on a much more cost-effective budget.
If you truly can’t afford any sort of space, you could work on a traveling basis. For instance, a service business could visit clients in their homes, instead of having a business location. No matter what your choice is, you’ll likely have to factor in space to your startup costs.
Although all businesses don’t sell inventory, if you’re in the retail, restaurant, wholesale, or manufacturing sectors, you likely need some form of inventory. Unfortunately, ordering inventory can create financial challenges. If you have too much inventory, you risk spoilage or getting stuck with items that aren’t selling, but if you have too little, you could lose customers who aren’t willing to wait for an item to be re-stocked.
Although inventory financing exists, it comes with minimum requirements which are usually not possible for new startup businesses. We suggest making inventory a part of your initial startup budget, and applying for financing if needed once your business is operational.
As you start your business, you’ll need to spread the word about your products or services. For instance, you might invest in banners, business cards, online PPC advertising, radio or print ads, and brochures, to name a few ideas.
Without investing in marketing, you won’t be able to accrue sales once your business is up-and-running. Still, to keep costs low, we suggest utilizing social media sites like Facebook and Twitter to advertise your new business. This way, you can market your business for free until your business starts generating sales!
We live in a technology-driven world, and your startup’s website, app, and overall online presence is often the first interaction someone will have with your brand. Due to this, it’s important that your business has a professional-looking website that is user-friendly and provides customers with information about your services, products, hours, and contact information.
Most customers research products or services on the Internet. Even so, 59 percent of businesses with fewer than five employees don’t have an online presence. It’s very easy to ensure that you’re in the other 41 percent, thanks to services like Squarespace and WordPress.
To get started, you must register a domain name, which usually carries a yearly fee. Then, you’ll pick a content management system (CMS) through which to build your website. These are sometimes free, but often require a monthly or yearly subscription cost.
If you’re fairly tech-savvy, it’s pretty simple to do this even without a coding background, but if you’re not familiar with web design you may want to hire a web design company to build the website, which is an additional cost that usually is worth the investment.
8. Office Supplies
Surprisingly, office supplies can add up rather quickly. If you’re operating in a traditional 9-5 work environment, then every employee will need a desk, chair, computer, and phone. Add in a water cooler, fridge, microwave, coffee, filing cabinets, and software, and you will reach a hefty sum. In terms of computers and office equipment, you may think that these should be considered assets, but the IRS allows startups to designate a limited amount of office equipment as expenses. Currently, you may deduct around $100k in this category. Don’t overlook office supplies, they can become a large chunk of your startup’s budget!
This type of cost applies to traditional commercial office and brick and mortar space leasing arrangements, you’ll be responsible for paying the electric, gas, water, Internet and phone bills. When determining your business’s budget, this should be factored in not only as a startup cost, but also as on-going expenses that you’ll always need to afford.
If you’ve hired employees for your business, you’ll need to pay them even if your business isn’t generating money yet. In addition, you should be allotting a certain amount to pay yourself. Remember that payroll includes benefits as well as all bonuses, stipends, commissions, and overtime pay. Many small business employers choose to outsource some of their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and streamline business operations.
11. Professional consultants
It may be tempting to try to be a jack of all trades – taking on as many responsibilities as possible to save money. You may think you can survive without hiring professionals such as bookkeepers, CPAs, or attorneys, but this isn’t always wise.
For examples, accountants can explain all the different legal structures such as S-corps, C-corps, LLCs, and sole proprietorships. Then, they can help you determine which one is best for you. They may also help you determine which benefit program to implement for your employees, and ensure that you’re complying with state and federal regulations. When tax season rolls around, they can be your right-hand man and save you huge sums of money in deductions. This is just one example of how outsourcing certain tasks can be beneficial to your business in the long run, even if it adds to your startup costs!
Just like you protect your health, car, and house, your business needs protection too. There are several different kinds of business insurance, and depending on your business’s industry and other preferences, could save you money and stress in the future.
Recurring vs. One Time Costs
You must understand that many of these costs are going to be recurring, so you’ll need to keep them on a monthly or annual basis. Other ones, such as incorporating fees or office furniture, are considered one-time costs. When you’re calculating your startup expenses, a good rule of thumb is to be able to cover six months of expenses up front. In other words, don’t count on your business’s revenue to start paying for your costs until after that early period is over. You’ll need a cushion while you’re developing your business and attracting new clients.
Smart consumers do extensive research before they make any purchases and recognize that there are ways to reduce some startup business costs.
Using software like Xero instead of hiring a full-time bookkeeper, working from home or a co-working space instead of signing a commercial office lease, and doing most of your marketing through social media and content marketing will all help to make your budget a little more manageable in the beginning.
Still, there are some costs we don’t recommended that you try to cut corners on. For instance, don’t buy used or poor-quality equipment just because it’s cheaper: you’ll lose time and money in the long run when you make repairs and eventually have to buy new equipment.
Very few small business owners can fund their business startup costs all on their own.
According to the SBA, about 75 percent of small business startup financing comes from loans, lines of credit, and credit cards. In addition, consider trying to fund startup costs yourself, and applying for a business loan once your business is up-and-running. This way, you’ll be more likely to qualify!
Before you start a business, you should carefully consider your idea or product, how much you should charge, and understand the challenges you could face. Then, once you establish your company, you’ll need to consider how much money you should have to start, how to structure your business, and create a business plan to keep you organized.
Financing is one of the most stressful parts of entrepreneurship, but being realistic about how much money you need and accurately estimating your business startup costs will go a long way. Startup costs are conceptually simple: add up expenses you’ll incur before starting, assets you’ll need, and how much money you’ll require to be operational during the first few months before sales start rolling in. Let us know in the comments if you have any questions!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.