A huge inhibitor to startup success is lack of awareness of crucial business startup costs. But you can alleviate this problem by knowing the main business startup costs you will face, so it becomes easy to estimate the costs involved with building your business to ensure its viability and to attract appropriate means of funding. Continue reading for the types of business startup costs you need to know.
Start With a Business Plan
An essential part of managing effectively the startup costs is simple: Be prepared. Entrepreneurs quickly get swept away by the excitement of starting businesses and the vision of seeing it all set and huge, yet don’t spend adequate time preparing and taking care of the details to get there. The easiest way to begin determining startup costs is by developing a business plan. A business plan creates the structure to help you grow and manage a startup. Even a simple, lean business plan makes you focus on aspects of your business such as:
Customer segments Revenue streams and revenue model Cost model or major cost categories Key activities Product line Growth projections and how they affect cost
These items and more each require some form of cost. Writing this plan, even a simplified version, creates a roadmap for success that you can easily overlay with key actions and expenses. Growth takes money, and a business plan is the first step to educating yourself on what it takes to build your business. But creating a plan also shows areas where you can cut costs or lower expenses. Be honest with yourself when creating goals, timelines, and products, and the financial costs will be reflected accurately as you start.
Types of Business Startup Costs
Every business is different, yet many startup costs are the same across business structure and industry. Review this list from the U.S. Small Business Administration (SBA), and keep in mind whether you will be functioning as a brick-and-mortar location, online business, or service provider.
Registration Costs
E-commerce platform Shopify found that 23% of businesses were surprised by the legal costs associated with starting a business. This includes activities such as registering and incorporating at the state and federal levels. Be prepared for costs associated with filing the following:
A business certification or certificate of assumed nameA certificate of incorporation, limited partnership, or articles of organization
NYC Business Solutions, a set of services offered by the city’s Department of Small Business Services, for example, gives an estimate of $100 to $120 for assumed name certification and $125-$200 plus fees for the other types of registration listed above. Registration costs vary across state and county, though you also may be required to file at the federal level, further increasing costs.
Insurance and Permits
Starting a business means preparing for anything, including being ready for worst-case scenarios with adequate insurance and permits. Insurance is a critical business startup cost to protect yourself, your team, and your business assets. Although this can be a surprising cost for many early-stage business owners, insurance is manageable in your budget. Even a low-cost insurance plan can protect you in case of liability or accidents. Federal agencies, rather than local entities, regulate various industries, including agriculture, wildlife, aviation, and broadcasting. If you’re in one of the specified industries, your permitting begins at a federal level. State permits also become necessary when involved in certain activities. Some requirements you may come in contact with include:
Health permitSales-tax permit
Your local secretary of state will be an invaluable resource in understanding local and federal regulations and what’s necessary for your business’s legal standing. Permits can range anywhere from less than $100 to several hundred dollars, so do specific research to identify permit costs.
Securing a Space
Starting a business means having a functional space to get your venture off the ground. Even with home businesses seeing a rise in popularity, many startups find that an office, warehouse, or kitchen is necessary for success. Startup costs related to space would include items such as:
Down payment Security deposit Internet connectivity Utilities Remodeling, if needed
You can still keep this cost relatively low, particularly in being honest about your needs. A coworking desk is the beginner space level, averaging around $150 per month, and quickly escalates from there.
Equipment and Supplies
Equipment and supplies quickly become one of the most critical aspects of startup business costs. Without these items, you will lack the resources needed to provide products or services to customers. Depending on your needs, supplies could run anywhere from a few hundred dollars for a simple office setup (such as for home-based businesses) to several thousand for more equipment-heavy companies such as catering or other service providers. Michigan’s Small Business Development Center shares a starting list of equipment items to keep in mind, including:
FurnitureOffice suppliesPoint-of-sale systems (POS)VehiclesShipping needs
The options are truly endless for this startup cost, and you should aim for leanness as you start.
Inventory
Inventory is a tricky part of startup business costs to pinpoint. The more product you have, the more you can sell, and the more revenue you can bring in. Income can then be reinvested into the business to cover more inventory or other costs. As researched by Shopify, almost 32% of business costs came from the product category, including inventory needs. Yet a surprising twist to this line item is the cost that surplus inventory can incur. You will want to find your sweet spot of inventory based on the number of product lines, the manufacturer’s suggested retail price (MSRP) of each, and the markup. Working with direct sales numbers makes understanding your inventory needs easier.
Marketing
Businesses are often under customers’ radars in the early stages, so marketing becomes a powerful tool in getting the word out to your audience. Marketing usually is a cost-effective startup expense due to its ability to boost brand awareness without big spending. You can start with a relatively small marketing budget in the beginning phases of growth. Put together the necessities such as:
A simple branding kit (logo, fonts/colors, social header) Website Business social accounts Word of mouth (begin with friends and family in the early phases)
Doing it yourself will help in retaining a small marketing budget. Canva, Visme, Design Wizard, Easil, Snappa, Crello, Stencil, PicMonkey, and similar tools have free and premium plans of around $100/year for all branding and marketing assets. Squarespace, Google Workspace, WordPress, Wix, Duda, Elementor, Carrd, and other similar options can be as low as $140/year for all website needs. Social media is a free asset to begin your business with, then switch to premium accounts when the budget allows.
Payroll
Payroll is a significant startup cost to cover, yet also highly dependent on the needs of your business. Your team at the start could look like a) just you, b) you and a few employees, or c) you and freelancers. Don’t lock yourself into employee obligations if you can run an efficient ship as a solopreneur. Setting aside enough for payroll could look like covering your living expenses for a three- to six-month runway period. Or it could mean minimum wage for an employee, dependent on city and state rules, or a freelance budget set aside for one-off projects.
Professional Assistance
The SBA considers a lawyer and an accountant two standard startup costs for starting a business, and you should not discount their importance just to cut costs. You may be unfamiliar with the legal or financial landscape. This makes hiring an attorney and accountant a critical move for success, as they will help navigate these unknown waters. You may end up saving money by not making costly errors. Hourly rates for both of these professional services vary dramatically, though finding options at $100 per hour is possible, to keep the rate smaller as you start.
Deducting Startup Costs
Remember how we mentioned an accountant as a crucial startup cost? There are many reasons why, yet the simplest is that good, accurate financial accounts can save you money in the long run. The IRS has a plethora of common, deductible business expenses that save you from a heavy tax burden. A deductible business expense must be “ordinary” (accepted in your industry) and “necessary” (helpful for your business), as defined by the IRS. This definition leaves a lot of ambiguity, but an accountant can help you distinguish what expenses are tax-deductible. You should aim to track all business expenses with detailed recordkeeping. Even a simple spreadsheet saved on your laptop reflecting various costs and their descriptions will make deducting startup costs easier at tax time.
