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Starting most small businesses requires an initial investment. The amount of startup capital you need depends on a variety of factors, including the type of industry, the product or service, and your store location. The least expensive businesses have start-up costs of around $12,000, but some businesses, such as restaurants, can cost more than $400,000.
The best way to determine how much it will cost to start a business is to list all of the anticipated expenses and the amount of each item. Let's take a closer look at exactly how much it will cost to start a business and the types of expenses you may incur.
Key Cost Statistics for Small Businesses
- On average, small business owners spend $40,000 in their first year. (Shopify)
- The cheapest are the setup fees, which are around $145, while the most expensive are the equipment, which typically range from $11,000 to $125,000. (Forbes Advisor)
- 76% of employeeless startups use personal funds to fund their business (Fed Small Business)
- The biggest financial challenge for non-employer startups is inflation and funding operating expenses. (Fed Small Business)
- The average hourly rate for an administrative assistant is $22. (salary)
- The average cost to build a website is $200, with maintenance costing $50 per month. (WebsiteBuilderExpert)
- The average cost of adding a new employee to your payroll typically ranges from $4,000 to $20,000. These costs don't include the employee's salary or benefits. (Indeed)
How much does it cost to start a small business?
Industry averages can help you get a rough idea of how much it will cost to start your small business, and as your business grows, you'll need strategies to keep costs low and choose the most affordable materials.
Keeping costs low helps maximize the return on investment you get from your business products and services. Actual costs will vary depending on factors such as:
- Business size
- A physical or online location
- Number of Employed People
- Required inventory costs
- The costs of producing a good, such as labor and raw materials
Online business and brick-and-mortar store
Whether you have a physical location or are solely online will greatly affect your business overhead. For example, data from Shopify suggests that building an online store can cost around $2,000 to $20,000. This range is just an estimate of how much it costs to host and design a custom e-commerce site. If you have a leaner or more robust business model, the exact cost may vary.
Bankrate Insights
Location also impacts small business costs: Texas, Oklahoma and Kentucky are the three cheapest states to run a business in, according to Approve's 2021 Business Cost Index, while California, New Jersey and Vermont are the most expensive.
Employee Payroll or Contractor Services
Employees are also a big expense: According to the Bureau of Labor Statistics, the average nongovernment employee makes between $41.03 and $43.26 per hour.
Considering the work hours are 2,080 hours per year, the annual cost of an average employee could be around $85,000-$90,000 based on wages from the Bureau of Labor Statistics. So, if you have five employees, you should estimate costs between $425,000-$450,000.
Another way to calculate the total cost of an employee is to factor in payroll, employee benefits, and taxes into your budget. The Small Business Administration recommends estimating employee costs at 1.25 to 1.4 times salary. Using this information, an employee with an annual salary of $50,000 would cost between $62,500 and $70,000.
Average costs by industry
The average startup costs vary widely depending on the field or industry you want to enter. Your industry will determine your entire business model, inventory needs, marketing strategy, and the cost of producing your goods or services. Here is a closer look at some industry averages.
| industry | average |
|---|---|
| Food and Restaurants | $375,000 |
| construction | $37,390 |
| retail | $39,210 |
| art | $32,960 |
| Entertainment | $12,272 |
Types of costs for small businesses
While it's possible to finance your business with very little upfront cost, you'll likely incur many expenses along the way. You'll need to determine whether an expense is essential to running your business or whether it's something you can defer until your business is established.
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- Mandatory Cost
- Expenses necessary to run a business
- Option fee
- Discretionary expenses not necessary for business operations
- Fixed cost
- Fixed-price fees per billing cycle
- Variable costs
- Expenses that can increase or decrease based on production volume, revenue, and other factors
Mandatory and optional costs
While some expenses can be avoided or delayed, some are simply unavoidable in the first place. These generally include:
General mandatory costs
- stock
- rent
- Website
- Payroll
- marketing
- technology
General option costs
- New equipment, not used or leased
- Additional Office Space
- Luxury business trips and entertainment
- Social Media Influencers
- CPAs when accounting software can be used instead
- Excess inventory
Fixed and variable costs
Some expenses will remain the same from month to month, while others occur once or occasionally throughout the year. Plan ahead to ensure you have enough funds to cover all your necessary fixed and variable expenses.
General fixed costs
- rent
- Insurance fee
- Property tax
- Essential Worker Salary
- Internet and mobile phone charges
- Loan payments
General variable costs
- Packaging and Shipping
- raw materials
- commission
- Credit card payments and interest
- trip
- consultant
Average cost for small business
Whether you're starting from scratch or expanding your business, you need to have a detailed understanding of how much your business will cost and how much you expect to spend. Having an organized business budget will help you plan for these costs and take into account changes in your revenue. Here's how much you can expect to spend on fixed and variable costs.
Average fixed costs
| Fixed cost | Average amount |
|---|---|
| rent | $2,500/month |
| tax | Tax rate from 13.3% to 26.9% |
| Salary | Hourly wage: $41.03 to $43.26 |
| insurance | $500 to $684 per year |
| Business loan payments | Example: $110,000 loan with 4.50% APR for 5 year term Monthly payment: $2,050.73 |
| marketing | 18% to 26% of revenue |
| Establishment Fee | $100 to $250 |
| Website | $200 to build, $50/month to maintain |
Bankrate Insights
When adding up your business costs, don't forget depreciation. Depreciation is the value that physical business assets lose over time due to aging and use. This cost affects your business' overall net worth when comparing assets and liabilities, so it should be included.
Average variable cost
| Types of variable costs | Average amount |
|---|---|
| Packaging materials | $0.10 to $15.00 per item sold |
| Credit card fees | 1.5% to 3.5% per transaction |
| raw materials | Varies by product and industry |
| Unmodified Utility | $2.10 per square foot |
| stock | Varies by industry |
| Shipping costs | It depends on the shipping method and box size. For example: UPS flat rate shipping rates range from $10.20 to $26.05. |
| Sales Commission | 20% to 30% of gross profit |
| Office supplies | $45 to $92 per month |
| trip | $309.62 per day |
How to save money and fund your startup
Businesses can save on start-up costs by cutting business expenses and securing extra income, or opt for a business loan.
Consider cutting down on your overhead costs to make your startup costs more manageable. Starting an online business is one way to reduce or eliminate the costs of office space and insurance, saving you a little extra money while you get your business off the ground. However, every business can take a hard look at their business expenses and cut costs that aren't necessary for the immediate success of their business.
Business owners can also apply for a start-up loan to provide the cash on hand they need to manufacture their product or expand their business. Many business owners take advantage of low-interest Small Business Administration (SBA) loans or business loans from traditional banks or online lenders.
Finally, consider applying for a business credit card to cover expenses. Business credit cards usually have fewer eligibility requirements and focus more on your personal credit score at the time of application. Business credit cards also have the benefit of not charging interest if you pay in full regularly. Interest is charged if you make the minimum payment or if the payment is past due.
FAQ
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The first step in starting a business is to calculate the costs of operating it. You need to calculate what your profits will be and how they will grow over time. Start by doing a break-even analysis to determine when your business will become profitable. Secure the financing you need and calculate the cost and interest of a loan. Attract potential investors who can provide you with a large amount of capital up front, and determine the tax implications of starting your business. The SBA can help you crunch the numbers and get an estimate.
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You need a business plan and a way to raise funds. Once you know what your business is, you need a way to raise funds to cover start-up costs and a plan for investing that money to get the most return. If you need help, the SBA can help you find a free counselor to walk you through each step.
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If you're starting your own business, it's important to understand the tax burden that comes with owning your own business so you're not hit with any big financial surprises later. Consider hiring a tax accountant who can help you stay on top of all the taxes and fees you'll be responsible for.
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The first step in starting a small business is to figure out and refine your business concept. Essentially, your business concept should be something you enjoy doing and believe you can make a profit from. Then do your research to know your market and your competitors, and write a business plan. Choose your business structure. You can choose between a sole proprietorship, LLC, or corporation. Next, register your business and get any necessary licenses. Next, finances. You'll need to open a business bank account and get business tools like credit products and a credit card processor to accept payments. Get business insurance, hire more staff (if you need employees), and start marketing.
